As predicted by analysts, the Bank of England has today voted to keep its interest rate steady, at 0.25 percent, and its government bond purchases at £435bn.
The bank sounded a more hawkish tone, warning of rates rising in “the coming months”, which sent the pound surging against the dollar, above $1.33. Some analysts have suggested that this rise could now come as early as November.
Two members of the bank’s Monetary Policy Committee (MPC) - Michael Saunders and Ian McCafferty - voted to increase rates by 0.25 basis points, to 0.5 per cent, to combat rising inflation. The remaining seven members of the nine person committee voted to leave them unchanged.
“All MPC members continued to judge that, if the economy were to follow a path broadly consistent with the August inflation report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations,” the MPC said.
It continued: “The circumstance since the referendum on EU membership, and the accompanying depreciation of sterling, have been exceptional. Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth likely to accompany that adjustment over the next few year."
Today’s decision comes amidst bullish inflation and unemployment data that would ordinarily trigger a rate rise. Unemployment fell 0.1 percentage points to 4.3 per cent in the three months to July, according to Office of National Statistics data released yesterday, the lowest level since 1975. Figures published on Tuesday showed that the Consumer Price Index inflation rate rose to 2.9 per cent in August, above the bank’s two per cent target.
But employment growth has not led to real wage increases. “Underlying pay growth has shown some signs of recovery, albeit remaining modest,” the bank’s summary noted.
The bank reduced interest rates last August to 0.25 percent after Britain’s vote to leave the European Union, and the country has not seen a rate rise in more than a decade, since July 2017.
Some economists remain sceptical that the rise will happen as soon as suggested, however. A poll of economists by Reuters in late August revealed that most do not expect a rise until 2019.
Timothy Graf, head of macro strategy for EMEA at State Street Global markets, said in reaction to the decision: “After recent warnings that markets were under-priced for potential interest rate hikes, the MPC appears close to following through and tightening its policy in response to above-target inflation. Going into the meeting, UK short rate curves were very flat and the trade-weighted pound was sitting not that far off its post-referendum lows. Today’s hawkish outcome has the potential to spark upward revisions in market pricing for both.”
James Knightley, chief international economist at ING, said: “While we certainly don’t rule out the possibility that the BOE reverses last August’s emergency rate cut quite soon, economic uncertainty relating to Brexit and the risks this poses for activity means that such action would not be the start of a new tightening cycle. Moreover, if there is concrete action on a meaningful Brexit transitional deal this would help boost sterling and could dampen the medium term inflation threat. As such, the prospect of a series of rate hikes seems remote.”