ANY remaining semblance of forward guidance at the Bank of England was called into question yesterday with the news that two members of the monetary policy committee (MPC) voted to raise interest rates this month.
Minutes of the MPC’s August meeting showed that Ian McCafferty and Martin Weale dissented from the majority view of seven other members, including governor Mark Carney, that rates should be kept on hold.
The minutes stated: “For two members, in particular, economic circumstances were sufficient to justify an immediate rise in Bank rate.”
The MPC’s first split vote since July 2011 came as a surprise to many economists, who had all but written off a rate hike this year after recent evidence that inflation is low and wages are falling.
Philip Shaw, economist at Investec, said the City is pricing in a rate hike in February, but he believes that is too close to the general election, so policymakers will have to choose between an early move this autumn or waiting until after May.
“Ironically, forward guidance seems to have clouded rather than clarified the outlook for the timing of the first increase in rates,” he added.
Base rates have remained at 0.5 per cent since 2009, when they were slashed to try to help nurse the economy back to health, and the UK’s economic recovery has fuelled speculation about when they will start to rise again.
Under its original forward guidance strategy, the Bank had said it would consider raising rates once unemployment fell to 7 per cent. That level has now been breached but August’s inflation report put extra emphasis on the importance of the pay data when considering the path of rates.
The central bank expects the UK economy to grow by 3.5 per cent this year but the minutes said expansion “was likely to ease a little as the boost from pent-up demand released by the easing in credit conditions and lifting of uncertainty faded”.
The minutes came as the latest CBI industrial trends survey showed that expectations for manufacturing output growth in the next three months are strong, despite an easing of pace over the past quarter. While nine sectors surveyed reported that the pace of growth had slowed in the past three months, 16 sectors anticipated growth over the coming quarter.
Yesterday’s minutes said: “Given the risk that an increase in labour supply or persistent concerns over job security would result in weak growth continuing for longer, there would be merit in waiting to see firmer evidence that solid increase in pay growth were in prospect before tightening policy.”
That was one of the arguments of the majority on the committee who wanted to leave rates on hold.
Sam Alderson, economist at the Centre for Economics and Business Research (CEBR), said: “The results of the minutes will re-fuel speculation of a rate rise before the end of the year, something that appeared to have lost considerable momentum with Tuesday’s lower inflation figures, and will add to the uncertainty.”
The CEBR still expects the first rate rise to come in early 2015, although it is unlikely that inflationary pressure is going to force this decision upon the bank, Alderson said.