Wednesday 23 August 2017

Bank of England board split on raising interest rates

Kristin Forbes is due to leave the BoE at the end of the month
Kristin Forbes is due to leave the BoE at the end of the month

Fergal O'Brien

A SPLIT among Bank of England policymakers has widened as two officials joined Kristin Forbes this month in her call for a rate increase, warning that inflation could rise more than had previously been forecast.

In the biggest division on interest rates in six years, the Monetary Policy Committee voted by five members to three to maintain the key interest rate at a record low of 0.25pc.

Michael Saunders and Ian McCafferty broke ranks, however, to demand an immediate hike to 0.5pc.

The pound erased its losses after the decision. It was little changed at $1.2740 as of 2.27 pm London time. Bonds fell, with the 10-year gilt yield rising nine basis points to 1.02pc.

The shift comes against an uncertain backdrop for the UK, with real earnings falling, consumer spending weakening and Prime Minister Theresa May unexpectedly losing her parliamentary majority after calling a snap general election.

At the same time, recent data have shown inflation accelerating faster than the central bank had projected just last month, with the rate now at 2.9pc.

Citing the pound's recent decline, the BoE said inflation could overshoot the 2pc target by more than previously thought. The three hawks also said that slack in the labour market appeared to have diminished.

Data published this week showed that average earnings grew by just 1.7pc, while inflation is now close to 3pc. The unemployment rate is 4.6pc.

"For these three members, they're obviously focusing on the inflation number, which was above consensus this week, and also on the unemployment rate itself, rather than wage growth," Rob Wood, an economist at Bank of America Merrill Lynch, said on Bloomberg Television. He added that they were "still holding that faith that the Phillips curve exists, that unemployment, as low as it is, will eventually turn into wage growth."

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This was Forbes' final policy meeting before she leaves the bank at the end of the month.

Even so, the MPC statement suggested that others on the committee are moving closer to making a similar argument.

"The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC's tolerance of above-target inflation," it said.

The recent general election also complicates the prospects for Brexit talks. When the BoE updated its economic forecasts last month, it assumed that Britain's adjustment to a new relationship with the European Union would be "smooth".

The BoE's comments are the first in more than a month from policymakers. (Bloomberg)

Irish Independent

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