The Bank of England has held interest rates at their record low amid signs of an internal split emerging about how to tackle rising inflation.
The Bank’s monetary policy committee was divided on the rates decision, with Kristin Forbes voting to raise borrowing costs immediately. Other members also indicated that they could join her at future meetings if they felt inflation was rising too quickly.
But for now, minutes of the latest policy meeting showed eight members of the MPC felt that the current 0.25% base rate and electronic money-printing programme were appropriate to support the post-referendum economy amid signs that slower pay growth and rising inflation were damping consumer spending.
The decision to hold rates in the UK comes a day after the US central bank, the Federal Reserve, raised interest rates to 1% and indicated that further increases this year were likely to keep rising inflation in check.
Forbes, who leaves the committee at the end of June, felt that inflation “was rising quickly” and was likely to remain above the Bank’s 2.0% target for at least three years. Minutes from this week’s policy meeting showed Forbes also felt that “the weakness in activity expected since the referendum had not materialised” and that unemployment “showed no signs of increasing”.
As such, she voted against the rest of the committee and advocated an increase in the base rate to 0.5%. It is the first split on the MPC since the aftermath of the Brexit vote in July 2016, when Jan Vlieghe voted for a cut in rates from 0.5% to 0.25%. The rest of the MPC opposed him but then voted for a cut in August 2016.
The MPC, under the leadership of the Bank’s governor, Mark Carney, has maintained that it is happy to let inflation rise some way above its target as it trades-off the need to support growth and jobs with keeping price rises in check.
But it has repeatedly said there are limits to how much overshoot in inflation it will tolerate. There were hints in the latest set of minutes that other policymakers could join Forbes this year in voting for a rate rise.
The minutes said: “With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that 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 pound strengthened after news of the split decision as traders took it as a sign that interest rates could be raised sooner than previously thought. Sterling hit a two-week high of $1.235 immediately after the announcement.
Inflation has been rising in recent months, hitting its highest level in more than two years in January at 1.8% on the back of higher oil prices and as the pound’s weakness since the Brexit vote raises the cost of imports to the UK.
The MPC expects inflation to rise to about the 2% target it has been set by the government “over the next month or so”, the minutes said. The committee expects inflation to “exceed the target materially by the summer”.
On the other hand, the minutes also noted signs of softness in the economy and justifications to keep ratesdown. The MPC said pay growth, which has been slowing in recent months, had turned out to be “notably weaker” on the latest figures than the Bank had been expecting in its latest set of economic forecasts in February.
Howard Archer, economist at the consultancy IHS Markit, said that despite Forbes’s vote for a rate rise there was little chance borrowing costs would go up soon.
“We maintain the view that the Bank of England is highly likely to sit tight on interest rates through 2017 and 2018 – and very possibly beyond,” he said. “While we believe the next move in interest rates will be up, we do not see this happening before 2019 and it could well be delayed further by prolonged economic and political uncertainties.
“However, given major uncertainties over the UK economic outlook, nothing can be ruled out on the interest rate front.”
Economists at Barclays also see rates staying on hold for the foreseeable future and said the committee appeared broadly united.
“Apart from Kristin Forbes, who will be leaving the Bank at the end of June, we believe clear diverging views still need to be articulated and expressed by individual members to upset the status quo,” Barclays said in a research note.
The vote was the first, and will be one of the last, for the Bank’s deputy governor Charlotte Hogg, who resigned this week after it emerged she had failed to disclose that her brother works for Barclays, which is regulated by the Bank of England. Her departure was announced after MPs concluded that she was not up to the role she was promoted into barely two weeks ago.
A departure date has not been agreed for Hogg but she is likely to stay on for up to three months.