Bank holds interest rates at 0.25% - but inflation splits the decision
PUBLISHED: 12:36 16 March 2017
The Bank of England has kept interest rates on hold at 0.25%, but mounting concern over surging inflation saw one policymaker vote for a hike in the first split decision since last July.
Minutes of the Monetary Policy Committee (MPC) meeting showed that while eight members backed the no-change decision, outgoing rate-setter Kristin Forbes voted for a rise to 0.5%.
Ms Forbes, who leaves at the end of June, made the move amid fears that inflation is “rising quickly and was likely to remain above target for at least three years”, according to the report.
While it marks the first non-unanimous vote since last summer, it also comes as the first call for a rate increase since January 2016.
The MPC decision is the last before Article 50 is triggered later this month and policymakers were widely expected to leave rates at 0.25% in the face of potential economic upset from Brexit negotiations.
But the move by Ms Forbes suggests growing unease at keeping rates at rock bottom amid soaring inflation from the weak pound and surprisingly resilient growth.
Minutes of the meeting showed the Bank is pencilling in growth of around 0.6% in the first three months of the year, following 0.7% expansion in the previous quarter.
The report added: “Although it was too early to make a confident prediction of growth in the second quarter, there had been relatively little evidence so far from the output indicators of a slowdown.”
The pound spiked on news of the split vote, rising over half a cent against the dollar to $1.23.
It also rose sharply, by more than one cent, versus the euro to 1.15.
Inflation is predicted to rocket from 1.8% to “materially” above the Bank’s 2% over the summer, peaking at around 2.8%, according to the Bank’s forecasts.
The Bank said there had been some signs of a consumer spending slowdown, with retail sales having “weakened notably”, but other areas such as the housing market remain robust.
A trade boost from the pound should also help wider growth “hold up”, it said.
The Bank has said it is prepared to tolerate higher inflation as a “trade-off” to support growth and employment ahead of potential economic upset from Brexit negotiations.
But for Ms Forbes, the “monetary policy trade-off had evolved to justify an immediate increase in Bank Rate,” according to the minutes.
The report added: “The weakness in activity expected since the referendum had not materialised. Unemployment showed no signs of increasing.”
It suggested other MPC members were also becoming uncomfortable with the trade-off, with the minutes showing “it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted”.
The decision follows a move by the Bank’s US counterpart, the Federal Reserve, to raise its benchmark rate for the third time in a decade on Wednesday by 0.25%, citing a strengthening jobs market.
Despite the dissent from Ms Forbes, the Bank is expected to hold a steady monetary path on this side of the Atlantic until the impact of Brexit becomes clearer.
This week’s meeting also saw outgoing deputy governor Charlotte Hogg vote on the MPC for the first and most likely the last time following her resignation after failing to declare that her brother worked for Barclays.
Her resignation was confirmed earlier this week - less than a fortnight into the role - after she came under heavy fire for breaking the Bank’s code of conduct by not declaring the conflict of interest.
She will remain at the Bank for up to three months for “transition purposes”, according to the Bank.