With just one member voting for a rate rise, is the Bank of England MPC right to be so dovish?

 
Ben Brettell

Nina Skero is an economist at the Centre for Economics and Business Research, says Yes

Given the absence of inflationary pressure in the UK, and the pound’s current strength against most major currencies other than the dollar, holding the base rate steady at 0.5 per cent is a sound decision. Inflation continues to hover around zero and even core inflation, which excludes items with volatile, globally set prices such as food and energy, remains well below the Bank of England’s 2 per cent target. Additionally, British exports have flatlined for much of 2015. While a number of factors have contributed to this, including the Greek crisis, the slowdown in China and weak world goods trade, the strong pound certainty hasn’t helped, and an interest rate hike would further strengthen the currency. Keeping these considerations in mind, it is little surprise that just one hawk ruffled the MPC’s dovish feathers. We maintain that the first rate rise is still some distance away, and unlikely to happen before the first quarter of 2016 at the earliest.

Ben Brettell is senior economist at Hargreaves Lansdown, says No

At first glance, it appears difficult to justify higher interest rates. Inflation is non-existent, and the combination of sterling strength and oil price weakness means that it could rise more slowly than previously thought. Meanwhile, global risks are building. However, the Bank of England is running the risk of having no ammunition in the event of a future downturn. If rates remain at rock bottom throughout this business cycle, when the economy next slows (as it inevitably will at some stage), the MPC won’t be able to cut rates in response, and its options will be limited to more quantitative easing. Furthermore, there is a valid argument that, by raising rates sooner rather than later, the Bank will be ahead of the curve and therefore able to raise rates more gradually through the tightening cycle. The desire of at least one MPC member to simply get the first rise out of the way thus seems entirely understandable.

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