BOE Policy Split Deepens as Three Officials Seek Rate Hike

Updated on
  • Forbes, Saunders, McCafferty seek 25 basis-point increase
  • BOE says inflation overshoot may be bigger than anticipated

BOE Holds Steady as Three Officials Vote to Hike Rates

A split among Bank of England policy makers widened this month as two officials joined Kristin Forbes in her call for a rate increase, warning that inflation could rise more than previously thought.

In the biggest division on interest rates in six years, the Monetary Policy Committee voted by five members to three to maintain the key interest rate at a record-low 0.25 percent. Michael Saunders and Ian McCafferty broke ranks to demand an immediate hike to 0.5 percent.

Kristin Forbes

Photographer: Kelvin Ma/Bloomberg

The pound erased its losses after the decision. It was little changed at $1.2740 as of 2:27 p.m. London time. Bonds fell, with the 10-year gilt yield rising 9 basis points to 1.02 percent.

The shift comes against an uncertain backdrop for the U.K., with real earnings falling, consumer spending weakening and Prime Minister Theresa May unexpectedly losing her parliamentary majority after calling a snap election.

At the same time, recent data have shown inflation accelerating faster than the central bank projected just last month, with the rate now at 2.9 percent.

Citing the pound’s recent decline, the BOE said inflation could overshoot the 2 percent target by more than previously thought. The three hawks also said that slack in the labor market appeared to have diminished.

Phillips Curve

Data published this week showed that average earnings grew just 1.7 percent, while inflation is now close to 3 percent. The unemployment rate is 4.6 percent.

“For these three members, they’re obviously focusing on the inflation number which was above consensus this week, and also on the unemployment rate itself, rather than wage growth,” Rob Wood, an economist at Bank of America Merrill Lynch, said on Bloomberg Television. They’re “still holding that faith that the Phillips curve exists, that unemployment as low as it is will eventually turn into wage growth.”

"Frankly I think it looks a little bit bizarre," Rob Wood of Bank of America Merrill Lynch tells Bloomberg. TV.

Source: Bloomberg

This was Forbes’ final policy meeting before she leaves the central bank at the end of the month. Even so, the MPC statement suggested that others on the committee are moving closer to making a similar argument.

“The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC’s tolerance of above-target inflation,” it said.

For the majority, reasons for keeping policy unchanged included slowing consumer spending and economic growth. It was too early to “judge with confidence how large and persistent” that slowdown would be, the MPC said.

Fed, SNB

The BOE decision came hours after the Federal Reserve raised interest rates for a second time this year and Chair Janet Yellen indicated she’s pressing on with normalizing monetary policy. The Swiss National Bank kept its key rate at a record low.

The minutes suggest that the BOE may be beginning to edge towards normalization, though Brexit and the cooling economy mean that its progress is likely to be cautious. The MPC said any rate increases will be at a “gradual pace and to limited extent.”

The outcome of the U.K.’s recent general election also complicates the prospects for Brexit talks. When the BOE updated its economic forecasts last month, it assumed that Britain’s adjustment to a new relationship with the European Union will be “smooth” -- avoiding a so-called cliff edge.

The BOE’s comments are the first in more than month from policy makers, who were in a quiet period during the election campaign. Governor Mark Carney was due to speak this evening at the annual high-profile Mansion House event in London’s financial district, but the event was cancelled after the fire at Grenfell Tower, a residential block in west London, that killed at least 17 people.

The BOE said in a statement that the planned speech will be given “in due course.”

— With assistance by Jill Ward, Lucy Meakin, Stuart Biggs, and Jana Randow

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