Policymakers to split over interest rates increase

The Bank of England. Picture: Getty
The Bank of England. Picture: Getty
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BANK of England policy­makers are heading towards their first split this year over interest rates amid mounting expectations that a hike in borrowing costs is on the horizon.

Clues over the outlook for monetary policy will emerge this week with the publication of latest minutes from the bank’s monetary policy committee (MPC), widely tipped to show members were unanimous in keeping rates on hold at 0.5 per cent on 9 July.

The last time the nine-member committee was divided in their voting came in December, when “hawks” Ian McCafferty and Martin Weale pressed the case for an increase to 0.75 per cent.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “There seems a very strong possibility that August will see the first split this year within the MPC on keeping interest rates unchanged. Both Martin Weale and Ian McCafferty could very well vote for an interest hike to 0.75 per cent, while David Miles could decide to leave the MPC with a bang by voting for a rate hike as well.”

Miles, who has served on the MPC since June 2009, has never voted for a rate rise but last week said: “The case for beginning a gradual normalisation in the stance of monetary policy is stronger than at any time since I joined the committee over six years ago.”

In a speech at the Resolution Foundation think-tank in London, the former Morgan Stanley economist added: “I think a first move up in bank rate soon is likely to be right.”

Miles’ comments were echoed just days later by governor Mark Carney, who said a decision over starting a slow and gradual increase in borrowing costs “will likely come into sharper relief around the turn of this year”.

Although many observers seized on Carney’s speech to suggest that the first move in rates for more than six years could happen before 2016, Archer said that IHS Global Insight was sticking to its forecast of a hike in February.

However, he added: “We have become markedly less confident in this call and there is now a very real possibility that the MPC could act before the end of 2015, most likely in November.”

The MPC minutes for its July meeting will be published on Wednesday, and while analysts at Investec expect them to show continued unanimity, they also believe that split voting could start in August.

“We will be looking for clues on whether the MPC is edging closer to tightening, not least on the back of strengthening wage data,” they added.

Official figures last week showed that average weekly wages rose by 3.2 per cent in the three months to May – the fastest rise in seven years.

With interest rates having been frozen since March 2009, savers would relish the opportunity to earn better returns, but for those businesses and consumers that have become accustomed to low borrowing costs, an upward move by the MPC would be seen as an unsettling prospect.

However, Carney said he expected rates to “slowly” rise to a level “perhaps half as high” as the long-term average of 4.5 per cent.

Wednesday’s minutes will be accompanied by the Bank of England’s quarterly inflation report, which will contain the latest predictions on economic growth and the outlook for the consumer prices index (CPI).

Official figures last week showed that CPI fell back to zero in June, from 0.1 per cent the previous month, but the Centre for Economics and Business Research expects inflation to begin rising slowly again over the coming months.

Chris Williamson, chief economist at Markit, said: “This leaves plenty of scope for rates to start rising later this year, perhaps November.”