MPC’s dovish stance starts ‘fraying’

The Bank of England (BoE) may not be as averse to raising the UK’s base interest rate as last week’s Inflation Report suggested, experts have said.

At a press conference following the report’s release, BoE governor Mark Carney had emphasised the headwinds throughout the global economy that stood in the way of the UK raising rates.

However, minutes from the latest Monetary Policy Committee (MPC) showed that two of the nine members voted in favour of a rate rise and the tone of the meeting suggested other members had been wavering.

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Samuel Tombs, senior UK economist at Capital Economics, said the more “balanced tone” from the minutes from the November MPC meeting meant “it might not take much stronger news on wages or growth for other members to join the two already voting to raise rates”.

Mr Tombs said the original consensus to keep rates lower for longer was “fraying at the edges”.

The minutes stated “there was a material spread of views on the balance of risks to the outlook”, which was a far cry from Mr Carney’s negative speech last week.

Mr Tombs said several data releases since the MPC meeting may add credence to concerns that keeping rates at historic lows was no longer necessary and may in fact be harmful in the long term.

But he admitted it was “hard to see what will trigger a majority of members to vote for an interest rates hike in the next few months”, given the “malaise” in the eurozone and the likelihood of inflation falling below 1 per cent.

Although Mr Tombs said he thought “a majority of MPC members are likely to vote to raise rates in the second quarter of 2015 – roughly six months earlier than markets currently expect”.

Guy Foster, head of research at Brewin Dolphin, said the ‘dovish’ views of Mr Carney, pushing for low rates for longer, “[do] not seem to be shared by his peers on the MPC”.

Mr Foster said there was “material uncertainty” about the usefulness of low interest rates in the current macroeconomic environment.

“The Bank would like to see growth continue at its current pace with very modest inflation to justify gradual rate rises,” he said.

“Instead the inflation picture is weak and the growth is strong but with an uncertain outlook.”

Mr Foster said the weak inflation outlook has encouraged the dovish stance of central bankers such as Mario Draghi of the European Central Bank, but also means MPC members have begun to “feel complicit in encouraging financial risk-taking” due to ultra-low interest rates.

But Helal Miah, investment research analyst at The Share Centre, said he did not think the MPC minutes will “have a material impact on when the Bank of England raises interest rates”.

Mr Miah still expected the BoE to implement its first rate rise in the third quarter of 2015, which was the current market consensus.