Bank of England vote to hold interest rates, despite MPC split

The committee voted 5-3 to retain the current low rate but it seems some MPC members are starting to think a rise in the rate is required to curb inflation.

It has also maintained government bond purchases at £435bn and corporate bond purchases at £10bn.

Sterling was protected somewhat from falling against the Canadian Dollar as crude oil prices dropped 2.8% yesterday, taking the value of the commodity to 46.88 U.S. dollars per barrel. They noted inflation was now expected to overshoot the Bank's target by more than previously expected.

The Consumer Price Index inflation rate leapt last month to 2.9 percent, boosted by the rising cost of energy, food and recreational goods. It reached 2.9% in May, above the MPC's expectation. The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.

"In contrast, pay growth has moderated further from already subdued rates", it cautioned. House price growth is also slowing. "A slowdown in household consumption, and GDP as a whole, had recently begun, and it was too early to judge with confidence how large and persistent it would prove to be", the minutes said.

"A slowdown in household consumption and gross domestic product as a whole had recently begun. although consumer confidence had held up, there had been further signs of a slowing housing market and new vehicle registrations had fallen sharply", the minutes read.

Export indicators have strengthened, probably reflecting both the depreciation of sterling and increasingly robust global demand. Most surveys of investment intentions have remained above their historic averages.

This was at odds with the Bank's predictions for growth of 0.4% between January and March, although the latest surveys from the main sectors suggest a slight pick-up in the second quarter. That is the highest count in favour of tighter monetary policy since May 2011.

Russ Mould, investment director at AJ Bell, said the MPC seems to be responding to the increase in United Kingdom inflation to four and five-year highs, as measured by the consumer price and retail price indices, even if some of the key causes of that spike - a higher oil price and a weaker pound - are now unwinding. For this reason, the MPC's remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

"Mr Carney might come to regret having not raised rates when it became clear that last year's European Union referendum hadn't hurt the economy".

The MPC sets monetary policy to meet the 2% inflation target and to sustain growth and employment but CPI inflation rose to 2.9% in May and could rise above 3% by the autumn.

The New Zealand dollar declined against the pound after the Bank of England policy committee kept rates on hold but with a split vote, while it fell against the USA dollar in the wake of yesterday Federal Reserve statement ... The BOE did note all three dissenters would wish to increase rates at a gradual pace and to a limited extent.

  • Zachary Reyes