Bank of England rate-setters vote unanimously for a freeze, but rate rises draw nearer

22nd July 2015


Members of the Bank of England’s Monetary Policy Committee voted unanimously to keep rates on hold at the last meeting, but their comments suggest that an increase in interest rates is drawing nearer.

Last week the bank’s governor Mark Carney said it was likely rates would begin to rise gradually from the turn of the year onwards.

The MPC minutes report: “For a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside at the current level of Bank Rate.

“For these members, uncertainty caused by recent developments in Greece was a very material factor in their decisions: absent that uncertainty, the decision between holding Bank Rate at its current level versus a small increase was becoming more finely balanced.”

However, they also state: “For most members, the current stance of monetary policy remained appropriate to balance the risks of inflation around the target in the medium term.”

Howard Archer, chief UK and European economist at IHS Global Insight, believes that from now on, interest rate decisions at MPC meetings are going to become progressively harder to call and this will probably have been the last time that unanimity prevailed for keeping interest rates at 0.5%.

He says: “There seems a strong likelihood that at least two MPC members will vote for an interest rate hike in August, and it could conceivably be three.

“Both Martin Weale and Ian McCafferty could very well vote for an interest rate hike to 0.75% in August, while – given his recent hawkish comments – David Miles could decide to leave the MPC with a bang by voting for a rate hike as well.”

Archer says IHS maintains its view that the Bank of England will lift interest rates from 0.5% to 0.75% in February 2016, but it has become markedly less confident in this call and there is clearly now a very real possibility that the MPC could act before the end of 2015.

He says: “An interest rate hike before the end of 2015 will become ever more likely if earnings growth picks up further over the coming months and the economy maintains healthy growth through the rest of the year (we suspect GDP growth improved to 0.7% quarter-on-quarter in the second quarter).

“While indicating that the decision to start raising raise interest rates will come into sharper focus around the turn of the year, Governor Mark Carney has also indicated that the actual decision to act will be data driven.

“Regardless of whether the Bank of England first acts in late-2015 or early-2016, we see interest rates only rising to 1.25% by the end of 2016,  2% by the end of 2017 and 2.5% by the end of 2018.”

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