BOE May Have a Silent Dissenter to Interest-Rate Increases

Updated on
  • Deputy Governor Cunliffe hasn’t made policy comments recently
  • Economy’s performance could limit potential for more hikes

CIBC's Jeremy Stretch on What Could Derail a BOE Rate Hike

The Bank of England may have a quiet dissenter among its ranks when it comes to the need for higher interest rates this year.

In speeches, interviews and Parliament testimony, eight of the nine Monetary Policy Committee members, including Governor Mark Carney, have backed the view that tightening is warranted -- and at a faster pace than previously thought. But Deputy Governor Jon Cunliffe has been noticeably quiet, raising questions about the views of one the MPC’s most dovish members.

Jon Cunliffe.

Photographer: Chris J. Ratcliffe/Bloomberg

Cunliffe, who’s in charge of financial stability at the BOE, objected to the rate increase in November, its first tightening in more than a decade, citing at the time a lack of domestic cost pressure. His silence on monetary policy now suggests he may still not be on board with the majority view, meaning there’s a chance of another split vote if the bank, as expected, moves again May.

“We’ve still got another month and a bit until the meeting. If the GDP data or wages disappoint, he could dissent,” said Alan Clarke, an economist at Scotiabank.

While one “nay” won’t stop the increase, it’s a reminder of the caution policy makers need to maintain because of Brexit and the larger-than usual uncertainty about the outlook. If growth wobbles or inflation slows sharply, the MPC’s broad cohesion could be shaken and the need for more tightening further out could be derailed.

Inflation Outlook

The BOE sees a need to keep tightening monetary policy

Source: Bank of England February Inflation Report

A survey of executives by Deloitte published Monday showed that business optimism has improved, though firms are worried about weak demand and their risk appetite has diminished.

At HSBC, economists are less upbeat than the central bank on growth and wages and say further hikes after May will be difficult to justify.

“Even if you do get a lift in wage growth in the next couple of months, which we think we will, a lot of that will be base effects,” said Liz Martins at HSBC. “So we are still not persuaded that by the end of the year, or in a year’s time for now, that there will be a case for a third rate rise.”

Oxford Economics has also questioned how fast policy can be normalized, partly because it sees inflation dropping below the BOE’s 2 percent target within months. By comparison, the central bank sees it staying above that level for at least the next three years.

BOE policy makers said after their meeting last month that an “ongoing tightening” will be needed over the coming years. While the bank kept its key rate at 0.5 percent, two of the nine MPC voted for an immediate hike. Cunliffe voted with the majority for no change.

Read more: Bloomberg Economics says the BOE can’t afford to hesitate

Crucial to their thinking is that slack is rapidly diminishing and the economy can’t grow as fast without generating inflationary pressures. Since then, wage growth has picked up to 2.6 percent, the fastest in more than a year, and the economy has maintained a relatively steady growth pace, though bad weather restrained output in March.

In November, Cunliffe, whose current BOE term ends in October, wasn’t alone in voting against the rate increase. But colleague Dave Ramsden has since changed his tune, saying in February that hikes would be needed “sooner rather than somewhat later.”

Carney said the same month that earlier and faster tightening may be needed, a line that’s been echoed by all other MPC members, except Cunliffe. Though he has delivered two speeches this year, both fell under his financial stability mandate.

Given the majority view, there’s a clear direction for now. Markets put an 84 percent chance on a May hike, and many expect a second increase in the second half.

“The key messaging will be around the labor market.” HSBC’s Martins said. “We might even pass the 3 percent threshold for wage growth and that will be enough for them -- everything else can be attributed to anomalous, first quarter snow-related factors.”

(Updates with business survey in sixth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE