A senior policymaker at the Bank of England defied her colleagues to vote to raise interest rates for the first time in over a year, as the Monetary Policy Committee (MPC) left monetary policy untouched.
Kristin Forbes voted to raise bank rate by 0.25 per cent. Forbes is an external member of the nine-member MPC who is leaving the Bank in the summer to return to an academic role.
Forbes said indicators of domestically generated inflation and low unemployment justified a rise. Meanwhile some members of the MPC noted it “would take relatively little further upside news on the prospects for activity or inflation” for tighter monetary policy to be considered, according to the minutes of the Bank's meeting.
However, the remaining eight members voted to keep bank rate at its historically low 0.25 per cent level, despite the Bank upgrading further its expectation of first-quarter GDP growth from 0.5 per cent to 0.6 per cent, with “relatively little evidence” of a slowdown.
The last time a member voted to raise rates was January 2016, when Ian McCafferty dissented. However, at the latest meeting he voted in favour of leaving policy unchanged, meaning the prospects of a more hawkish turn on the MPC may be short-lived.
Deputy governor Charlotte Hogg, who will leave the Bank soon after not following compliance procedures, fell in line with the consensus.
Sterling shot up against both the dollar and the euro after the Bank's announcement, rising to highs of $1.2348 and €1.1533 respectively at the time of writing.
The yield on 10-year UK government bonds regained its level of earlier this morning, at around 1.28 per cent, according to Tradeweb.
The MPC's decision to continue to hold fire was prompted by the expectation of economic weakness to come, with weakening retail sales supporting the Bank's analysis, it said.
The Bank's statement following its monetary policy meeting said the MPC “expects a slowdown in aggregate demand” during 2017 as real incomes stagnate.
However, the Bank acknowledged a pick-up in trade may offset the fall in consumer demand. Exporters have been boosted by the weaker pound since the EU referendum, as foreign companies find sterling-denominated products cheaper.
The Bank noted the divergence between the outlook of financial markets and that of households to the economy's prospects. Share prices of domestically focused companies have “underperformed”, the Bank said, but households so far do not seem to be feeling the effects.
“The nature and timing of [the divergence's] resolution are likely to be key factors in the MPC's policy assessment,” the Bank said.
That resolution could come when weak wage growth feeds through to demand. Pay growth has already been “notably weaker” than expected at the start of February, the Bank said.
The MPC's statement noted the path of wages will be a critical factor in policy over the coming months
The Bank also voted to keep its quantitative easing programme of bond holdings unchanged,with £10bn of corporate bond purchases and £435bn in government bonds.