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MPC vote split: What does that mean for future interest rate rises?
Today it was revealed that the monetary policy committee's (MPC) vote on whether to raise interest rates last month was split for the first time in three years, with two dissenters in the ranks arguing a "rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up".
While some analysts had predicted the vote would not be unanimous, many were surprised it was split 7-2. Here's our round-up of what they are saying in response.
Christian Schulz, senior economist at Berenberg, is now tipping a potential rise for February. He said:
We had expected one dissenting vote at last meeting. Two dissenters mean that chances for a rate hike still this year may have increased a bit…. In our view, the probability for a first rate hike remains finely balanced, but the majority is likely to hold-out until February next year. That would still be a bit before current market expectations.
Jonathan Pryor, head of FX dealing at Investec Corporate and Institutional Treasury, said the split was "somewhat of a shock", suggesting the news would leave many confused:
If Mervyn King was the master of talking down the value of sterling then Mark Carney is rapidly becoming a scholar at delivering mixed messages for the pound and when the UK will first hike interest rates…. This vote is likely to leave UK businesses scratching their heads about the direction of sterling and the best way to guard against potential volatility over the coming weeks and months.
Although the split surprised Sam Hill, senior UK economist at RBC Capital Markets, he said an increase was still not expected any time soon:
In light of the hawkish dissenters, the pressing question becomes, how close to joining them are the other MPC members? On this, we are told that “for most members there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate”. That view can only have become stronger following yesterday’s CPI print of 1.6% y/y versus the Bank’s surprisingly high forecast of 1.9%… Overall, we take the view that the minutes are not signaling that other members are imminently about to join Weale and McCafferty.
Dominic Bryant , senior global and structural economist at BNP Paribas, agreed:
Clearly a firm majority remained in favour of no change to policy, although the line in the minutes was that “For most members, there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank rate”. The use of the word immediate is important as it does not preclude a rate hike coming soon, just that one wasn’t appropriate at the August meeting.
Investec Specialist Bank's chief economist Phillip Shaw took the longest view of all the analysts though, noting that the forthcoming general election could push back an increase to next summer:
Consensus (and indeed the yield curve) is looking for a rate rise in February next year. However this would mean that a hike would take place just three months before the next general election… It is relatively rare for a general election for be preceded by a rise in rates and even then (as in 1996/97 and 2004/05) the lead times have been considerable, a period of at least six months. Were it not for the election we would be quite happy to fall into line with consensus, or to predict a May hike (the MPC announcement that month is set for 8 May, the day after the election). But while this is not impossible, historical political precedent inclines against this.
Nick Bate, UK economist at BoA Merrill Lynch, echoed the February forecast:
That the vote was more hawkish than expected was amplified by governor Carney's comments at the inflation report press conference last week. He gave little mileage to the "earlier rate rise might help deliver a smoother tightening path" view, when he already knew that two members had (at least partly) used that argument to vote for a rate rise. Thus, there may be even more questioning of whether he is speaking for himself when he makes speeches/comments/testimony, or whether he is trying to convey the aggregate sentiment of the committee… Overall, even after today's surprise, we maintain our expectation of a first rate rise in February next year.