Bank of England reveals split vote as interest rates stay on hold

The Bank of England in London.

The Bank of England in London. - Credit: PA

The Bank of England today revealed its first split vote on interest rates since last year, but the prospect of sustained near-zero inflation means an increase is still not likely to come until early next year.

Members of the bank’s Monetary Policy Committee (MPC) voted 8-1 to leave interest rates on hold this month at 0.5%, where they have remained for more than six years.

Improving pay growth and consumer confidence has convinced some rate-setters that inflation could rise more quickly than expected and the Bank of England has increased its expectation for annual economic growth this year from 2.5% to 2.8%.

But inflation is being held back in the short term by the latest plunge in oil prices and the sharp strengthening of the pound, which makes imports cheaper.

The bank forecasts that inflation will hover around zero for the next few months, with the potential for again turning negative as it did briefly earlier this year.

For most MPC members, this removes the need to hike rates now in order to keep inflation from overshooting its 2% target in the next couple of years though one official, Ian McCafferty, voted to increase rates by 0.25% to 0.75%. It was the first dissent since a series of 7-2 split votes at the end of 2014.

In a new move, the bank today published minutes of the MPC rates meeting alongside the decision itself, as well as issuing its quarterly Inflation Report.

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It appeared to endorse market expectations which have pencilled in the timing of an interest rate rise for next spring, unchanged from the timing indicated at the bank’s previous inflation report although the rise in rates after that is seen as being slightly steeper.

The report could dampen expectations that a rate rise could come as soon as the end of this year, which had been heightened by recent remarks by officials including Bank of England governor Mark Carney.

Rates have remained unchanged since they were cut to 0.5% in March 2009 to prop up the UK economy at the height of the recession, but the recovery has spurred expectations that they will need to be increased soon.

An increase will add to repayment costs for borrowers such as mortgage holders but offer a glimmer of hope to savers whose nest-eggs have been steadily eroded by more than six years of low rates.

Sterling fell by a cent against the US dollar and the euro as expectations that the Bank might hint at a rate hike much sooner were dampened.

Instead, its projections signal that consumers will enjoy several more months of low borrowing costs and a flat cost of living - with more money in their pockets as wages rise.

The Bank of England’s expectation for the path of inflation is a key projection for reading when it might increase interest rates.

It continues to see Consumer Price Index (CPI) inflation reaching 2% over the next couple of years.

But it forecasts that CPI will have remained at zero in July and August before edging up in September, with a margin for error leaving open the possibility that it could be lower.

The majority of the weakness in inflation is seen as being caused by energy, food and other goods prices, much of which had been expected to fade.

But a recovery in the oil price has been held back after Iran agreed a deal with the US on its nuclear programme which should see sanctions lifted and the door opened for more crude to start pumping into the world’s supplies.

The Bank said that the falls in energy prices in recent months “will continue to bear down on inflation at least until the middle of next year”.

It said this meant that the near-term outlook for inflation was weaker than at the time of its Inflation Report three months ago, with CPI “expected to remain close to zero before rising around the turn of the year”.

On the other hand, wages have been increasing more strongly than the Bank had expected and it has hiked its forecast for pay growth this year from 2.5% to 3%. But unemployment figures have disappointed, with recent figures showing the first rise for more than two years.

Meanwhile, the bank also published the latest letter from Mr Carney to Chancellor George Osborne explaining why inflation remained more than 1% off its 2% target.

He said: “In the view of the MPC, inflation is likely to remain close to its current rate over the next few months. It is therefore likely that I will need to write further open letters to you in coming months.

“In the absence of further falls in commodity prices, however, inflation rates close to zero are unlikely to endure beyond this year.”

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