BOE's Lone Dissenter Belies Long Path to Lifting Interest Rates

  • External MPC member Forbes voted for 0.25% increase this month
  • Previous single votes for change haven’t led to policy change

One vote does not make a Bank of England interest-rate increase.

Kristin Forbes’s lone call for a hike this week may have been augmented by minutes that indicated some other policy makers may not be far behind her, but history shows it’s a long path from a single vote to a majority.

Kristin Forbes

Photographer: Kelvin Ma/Bloomberg

Martin Weale and Ian McCafferty voted for rate increases under current BOE Governor Mark Carney -- the latter in both 2014 and 2015 -- though they subsequently dropped their calls as the outlook turned. Carney himself, along with other policy makers, spent 2015 repeating a line that the next move in rates would be up, before the Brexit vote scuppered that view and led to a cut to a record low of 0.25 percent.

The bank kept the benchmark rate at that level on Thursday in an 8-1 vote that saw Forbes unexpectedly support an increase to 0.5 percent. Some of those in the majority said it might not take much more strength in either inflation or growth for them to also shift to the view that the economy needs some air taken out of it.

“We’re still quite a long way off,” said Andrew Goodwin, an economist at Oxford Economics. “It’s difficult to gauge, the idea that some members are considering switching camps. I’d be surprised if it was enough to actually get a rate hike through.”

Financial markets are equally skeptical. While sterling swaps data shows bets on a hike by mid-2018 increased after the decision, the probability of one this year remains below 30 percent. The chance by the end of 2018 is at 65 percent.

Forbes’ dissent was based on an outlook for above-target inflation over the next three years, combined with few concrete signs of slower growth in the British economy. Consumer prices rose an annual 1.8 percent in January, the most since 2014, and probably hit the BOE’s 2 percent goal last month. The rate is forecast to reach close to 3 percent later this year.

So far, the rate-setting committee has said that it will tolerate, to a degree, a period of high inflation to safeguard jobs and growth. Last month, it even said there’s more slack in the economy than previously envisaged, meaning the unemployment rate can fall lower without propelling wage gains and inflation. Forbes said she disagreed with that level, a sentiment echoed by her MPC colleague McCafferty.

The potential for surprises from the committee could be marginally bolstered in the coming months by Charlotte Hogg’s departure following her resignation this week. No timescale for her leaving has been published and the process of hiring her replacement could take months, leading to the possibility of a temporary eight-member MPC, albeit one in which Carney would have the deciding vote in the event of an even split.

The balance will also be affected by Forbes’ own exit at the end of June, to return to her role at MIT. Her replacement, who will be appointed by the Treasury, may not be of the same view when it comes of monetary policy.

Forbes would not be the first outgoing MPC member who has called for a change in stance in their final months as a policy maker. In 2013, the then-governor Mervyn King voted in the minority for more quantitative easing in his last five months, while Andrew Sentance unsuccessfully started a push for tighter policy in June 2010, a year before he left.

“She only has a few months to go. There’s a possibility she’s being more outspoken as a result,” said Ruth Gregory, an economist at Capital Economics in London. “It would probably take more evidence of second-round effects, a sharper pickup in inflation expectations, for a change in the current neutral stance” of the MPC as a whole, she said.

While the BOE raised its first-quarter growth forecast to 0.6 percent from 0.5 expansion and said there was relatively little evidence in indicators of a slowdown, it also offered a note of caution. Wage growth remains soft and retail sales weakened “notably,” it said.

Against that backdrop, economists have warned that Brexit presents a threat to any forecasts, which may make policy makers leery of rushing to increase.

“We’ve been burned in the past,” said George Buckley, an economist at Nomura in London., in a Bloomberg Television interview. “Everyone thought that interest rates were going to go up and we had to revise our forecasts many times.”

— With assistance by Jill Ward

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