Divisions are beginning to show within the majority on the Bank of England’s interest rate setting committee who want to keep rates on hold because of risks to the economy.
While there are no signs that rises are on the horizon – the market has pushed back expectations into next November after the dovish tone of the recent inflation report – the latest meeting minutes record a “material spread of views”.
Members of the Monetary Policy Committee again voted 7 to 2 in favour of keeping rates at their record low of 0.5 per cent, with Ian McCafferty and Martin Weale dissenting for the fourth consecutive month in favour of raising rates by 25 basis points.
The vote was unanimous on keeping the stock of gilts bought on the BoE’s quantitative easing programme unchanged at £375bn.
The minutes record that the majority discussed the risks that growth might soften more than anticipated and inflation might stay below the BoE’s 2 per cent target for longer meant a “premature tightening in policy would leave the economy vulnerable to shocks”.
But against that, there was the fear that the room for non-inflationary growth may be eliminated more quickly than forecast as unemployment continues to fall and wages start to show signs of picking up, risking inflation overshooting its target.
“Individual members ascribed materially different probabilities to these risks,” the minutes conclude.
David Tinsley, economist at UBS, said the reference to a spread of views suggested it would be wrong to assume that all of the seven members voting for a hold in rates were doing so for the same reason.
“These minutes suggest the discussion in the committee on policy rates is a little more ‘live’ than recent speeches might suggest,” he said.
Ross Walker, economist at RBS, said while there was little imminent chance of another dissenting vote, the minutes hinted the majority “are not quite as cohesively dovish as we had thought”.
Sterling bounced off the one-year low it touched in early trading on Wednesday as traders absorbed the slightly-less dovish tone of the minutes.
Those in favour of a rate rise believe that with signs of life in average earnings growth, now is the time to act before inflationary pressures build.
They argue that even after a rise “monetary policy would remain extremely supportive”.
Chris Williamson, chief economist at Markit, said that for now it was clear “the doves are still ruling the roost at the Bank”.
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