Split between Bank of England governor Mark Carney and chief economist Andy Haldane puts August hike back on table
The Bank of England’s chief economist broke ranks with the governor for the first time in seven years yesterday as he called for higher interest rates, putting a hike in August back in play.
Andy Haldane was one of three hawks on the nine-member monetary policy committee (MPC) to vote to increase bank rate from 0.5 per cent without delay.
The discord in the MPC reflects the quandary facing the Bank, with signs of rising wage pressures at the same time as doubts loom over the strength of the UK economy.
Read more: Bank of England holds interest rates but Haldane turns hawk in 6-3 vote
Haldane is generally considered to be the free thinker on the committee, and his views have previously clashed with governor Mark Carney’s. Yet his vote to hike surprised City economists and helped sterling gain more than a cent against the US dollar yesterday. He has only voted to raise interest rates once, last November.
“The factions within the MPC are becoming clearer,” said Jeremy Thomson-Cook, chief economist at Worldfirst.
“The doves are looking to wait and see how the data develops and buy the UK economy a little more time, while the hawks are honing in on higher wage settlements and what that should mean, eventually, for inflation.”
The Bank was forced to put off a widely anticipated rate rise in May after weak first-quarter GDP growth of only 0.1 per cent, but has indicated that it believes weakness was caused by bad weather.
Read more: Bank of England reaction: Sterling rallies on hawk Haldane
The MPC downplayed negative data yesterday, saying that members had taken “greater reassurance that the softness in the first quarter had been largely temporary.”
“There was widespread evidence that slack was largely used up,” the MPC said, suggesting the Bank’s economists believe there is little room before a tight labour market prompts inflationary pressures.
Higher oil prices and a weaker pound will also push inflation higher than forecast last month, the MPC said. Consumer price index inflation has run above the Bank’s two per cent mandated target since February 2017.
The hawkish tone put an August hike back into play, with the probability of a move jumping to 68 per cent in the aftermath of the decision, up from only 50 per cent before the meeting, according to Axa Investment Managers.
Silvia Dall’Angelo, senior economist at Hermes Investment Management, said: “The Bank seems determined to deliver one more hike in the second half of the year, justified by a tight labour market and an economy now working close to potential.”
However, weak industrial production data and recent economic surveys suggest that any decision to raise rates – cutting off support to the economy as the UK approaches Brexit – may be finely balanced, she added.
Read more: City economists say Bank of England must hold interest rates