InvestmentsAug 6 2015

Market View: MPC vote split pushes back rate rise

Search sponsored by
Market View: MPC vote split pushes back rate rise

While the message remained the same - the 77th straight month of rates held at 0.5 per cent - the Bank of England’s Monetary Policy Committee recorded its first vote split this year.

As FTAdviser sister title Investment Advisers reported, Ian McCafferty voted in favour of a rate rise in the bank’s August meeting, while most economists had been expecting a 7-2 split.

With this in mind, for some deeper analysis of the central bank’s ‘Super Thursday’ data dump, here are the views of three economists:

Ben Brettell, senior economist at Hargreaves Lansdown.

“The Bank of England’s capacity to surprise markets remains intact,” he commented, adding that the minutes revealed concerns that the strength of the pound and recent further falls in the oil price would mean inflation increasing more slowly than previously thought.

Sterling immediately weakened on the news, as expectations for the timing of the first interest rate rise were pushed back, noted Mr Brettell, meanwhile the FTSE 100 jumped.

“It will take some time for more MPC members to be persuaded higher rates are appropriate, in my view until spring next year at the earliest. Thereafter the path of rate rises is likely to be a slow incline, and it wouldn’t surprise me to see them stuck on 0.75 per cent for some time.”

The stockbroking giant’s numbers man added that there appears to be some desire to simply get the first rise out of the way, if only to give the bank some ammunition in the event of a future downturn.

“If rates remain at rock bottom throughout this business cycle, when the economy next slows (as it inevitably will at some stage), the bank’s options will be limited to more quantitative easing.”

Samuel Tombs, senior UK economist at Capital Economics.

“Today’s releases from the MPC suggest that an interest rate rise is still not imminent,” he stated, pointing out that the committee also revised down its forecast for CPI inflation over the next twelve months and still expects it to only just return to the 2 per cent target at the two year policy horizon.

“This suggests that most MPC members see the market expectations on which the forecast is based – for interest rates to start rising in spring 2016 – as broadly correct.”

Mr Tombs suggested that it would not be surprising if one or two more MPC members joined Mr McCafferty in the coming months – the minutes emphasised that ‘some members’ saw upside risks to the inflation forecast.