BOE Split, Two Members Opted to Hike Rate in August

Surprisingly, two MPC members voted for raising the BOE’s Bank rate to 0.75% from 0.5% earlier this month, the minutes for the August meeting showed. The dissents, Martin Weale and Ian McCafferty, indicated that ‘economic circumstances were sufficient to justify an immediate rise in Bank Rate’. They were not concerned that rate hike would undermine the economic recovery. Rather, they believed that an early rise could help the central bank keep future increases smooth and gradual. The more hawkish minutes have raised speculations of a rate hike in the UK by the end of this year.

Although soft inflation had given more room for policymakers to leave the monetary policy unchanged, Weale and McCafferty voted to increase the policy rate by +25 bps due to the lagging effect of monetary policies. Both saw signs of accelerating growth that would start to drive faster growth in wages and hence inflation. According to them, the existing economic backdrop was ‘sufficient to justify an immediate rise in bank rate’. Despite the slack in the labor market, as monetary policy could be ‘expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them’. The members stressed that the monetary policy would remain ‘extremely supportive’ even after the hike.

The members also suggested that an early rise would ‘facilitate the Committee’s aspiration that the rises in Bank Rate should be only gradual’. Although it cannot be ruled out that financial reaction to the first rate hike after recession would be negative, they warned that ‘it was unclear that these risks would be lessened, and indeed possible they would be augmented, by delaying that increase’.

However, other members voted for leaving the policy rate unchanged. As mentioned in the minutes, ‘for most members, there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate’. The majority of the members were concerned that the pace of economic growth might slow while wage growth might remain weak for some time. They preferred to wait for ‘firmer evidence that solid increases in pay growth were in prospect before tightening’. While the minutes turned out to be more hawkish than anticipated and the split signals that Carney’s consensus had been broken, Weale and McCafferty would continue to be the ‘minority’ in the coming few months.

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