The Bank of England shocked financial markets yesterday when it said three of its policymakers voted for an interest rate increase, the closest it has come to raising rates since 2007, despite signs of a slowdown in the UK economy.
The unexpectedly tight 5-3 vote adds questions over monetary policy to uncertainty over the UK’s political outlook since prime minister Theresa May failed to win a parliamentary majority last week. Bank of England policymakers Ian McCafferty and Michael Saunders joined previous rate rise advocate Kristin Forbes in voting to reverse the bank’s decision last August to cut rates to a record low 0.25%, the bank said.
Governor Mark Carney and the four other members of the Monetary Policy Committee voted to leave rates unchanged. Financial markets were pricing in a roughly 50% chance of an interest rate hike by next June. However, many economists said they still saw no rate increase on the horizon possibly for another two years.
Sterling jumped almost a cent against the dollar after the decision but it pared gains as doubts grew about whether an outright majority of Bank officials would back higher rates in the foreseeable future.
“Last week’s election unexpectedly gave us a hung parliament, and now it seems the Monetary Policy Committee is also split down the middle,” HSBC economists Elizabeth Martins and Chris Hare said.
“We think there could be a protracted period of split votes, as political uncertainty, waning growth momentum and weak wages weigh against the case for tightening,” they said.
The UK’s economy slowed sharply in early 2017 as consumers felt the pinch from higher inflation and slowing wage growth. That had led most investors to think it was unlikely the bank would quickly follow the lead of the US Federal Reserve which raised interest rates for the second time in three months late on Wednesday.
Economists polled by Reuters had expected only Forbes, whose committee term expires at the end of the month, to back higher rates. Attention is now turning to the future make-up of the committee.
The ECB last week left its benchmark interest rate unchanged, dropped reference to future rate cuts, and said its expected interest rates to remain at present levels for an extended period of time.
It said it would be ready to extend its quantitive easing programme if needed. n Reuters (more reporting by Irish Examiner staff)
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