Pound rebounds as Bank of England divides over interest rates

Finally the Monetary Policy Committee has split over interest rates, with two members voting for a rise.

by Rachel Savage
Last Updated: 02 Oct 2014

No longer is the Bank of England’s Monetary Policy Committee singing from the same hymn sheet, with the vote splitting 7-2 over whether to finally raise interest rates from their record 65-month low of 0.5% - the first dissent since 2011.

Martin Weale and Ian McCafferty were the surprise renegades, after economists surveyed by Reuters had predicted the vote would be unanimous again, voting to put up rates to 0.75%. Their rationale? That wage growth is lagging falling employment and expanding GDP.

‘These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up,’ the minutes of the MPC’s 6th-7th August meeting said.

‘They noted that it was possible that wages were lagging developments in the labour market to some extent... Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising [the] Bank Rate in advance of them.’

That might explain the rather mixed messages from Bank governor Mark Carney and his crew over stagnating wage growth. The quarterly Inflation Report, released last week, fretted over ‘remarkably weak’ pay growth, before Carney said on Sunday the Bank may not need to wait for it catch up with prices before interest rates went up.

The dissent meant the pound rebounded against the dollar and euro this morning, having dropped sharply yesterday after inflation fell unexpectedly to 1.6%. It spiked as high as $1.6678, before dropping back to $1.6641, a 0.15% rise. That was after plunging almost 0.6% versus the dollar yesterday. Against the euro it was up 0.44% to 1.2530.

All these short-term market moves are part of the wider guessing game, though. Just when will interest rates finally rise?

‘Low inflation numbers, the lack of wage growth and concerns about euro zone growth -- the U.K.’s largest trade partner, suggest... the majority [of the MPC] will continue to opt for the status quo in the next few months,’ said ING Bank economist James Knightley. ‘It currently looks more likely to be February.’

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Economy

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