The Bank of England’s monetary policy committee voted seven to two to leave interest rates unchanged at 5.25 per cent earlier this month, with the majority expressing concern that another rise might have been considered “excessive tightening”.
The split, revealed in minutes published on Wednesday, was in line with analysts’ forecasts. But the pound fell as traders found the debate contained in the minutes of the February rate-setting meeting slightly less hawkish than expected.
Money markets lengthened the odds on further rises in interest rates, though the City is still expecting another 0.25 basis point increase as early as March.
The Bank said in its quarterly inflation report last week that it expected inflation to overshoot its 2 per cent target over a two-year horizon if interest rates were not raised again, in line with market expectations.
The further tightening of monetary policy would be needed despite a sharp drop in energy prices forcing inflation down in the medium term, it said.
The minutes of the meeting showed that although the majority of committee members thought there was limited spare capacity within the economy, and there had been a tightening of the labour market, there had nevertheless been little movement in pay settlements.
Indeed, one member – assumed by analysts to be David Blanchflower – thought firms’ spare capacity was greater than many thought and this would continue to subdue wage growth.
The committee also noted that inflation had been volatile over recent months.
“Changes in the prices of gas and electricity had a material impact on the recent and prospective near-term profile of CPI inflation,” said the MPC, adding that this caused some members to believe there were “considerable....downside risks to inflation in the near term.”
However, it was accepted that the fast pace of growth in credit and buoyant asset prices could boost spending in the medium term.
In conclusion, the majority felt it was a good idea to wait and see the effects on demand of recent rate rises before taking further action.
The two dissenters, Tim Besley and Andrew Sentance, called for a 0.25 basis point increase in rates, arguing “the degree of policy tightening since August was still modest relative to the rise in inflation...”
They placed a greater weight on upside inflation risks, citing concerns that robust demand was leaving firms increasingly willing to push up prices and that inflation expectations had risen.
Richard McGuire at RBC Capital Markets said the report should challenge the market’s assessment that a rate rise was likely in March.
“While not challenging the tightening bias implicit in last week’s Inflation Report, these minutes give little indication there is much momentum within the MPC as regards additional tightening near term,” said Mr McGuire.
“With the majority of the committee appearing to be in data-watching mode, the balance of risks have tilted against the delivery of a further round of tightening next month.”
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