A Bank of England’s monetary policy committee voted 7-2 in favour of holding interest rates steady. Photograph: Alicia Canter for the Guardian
The Bank of England left interest rates on hold at their record low of 0.25% amid sluggish pay growth and a squeeze on household spending, while hinting that a rise may come sooner than expected.
The Bank’s monetary policy committee was split, with Michael Saunders and Ian McCafferty calling for an immediate rise to 0.5% to keep rising inflation in check. City economists had expected a vote of 7-2 to hold the rate steady.
The Bank’s decision comes amid “considerable risks” to the economy from the Brexit process, as households, businesses and the financial markets respond to the vote to leave the European Union. “The circumstances since the referendum on EU membership, and the accompanying depreciation of sterling, have been exceptional,” the MPC said.
However, with signs of a strengthening economy, Threadneedle Street said “some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target”, according to minutes of the MPC meeting.
Although the MPC opted to keep rates on hold, Threadneedle Street noted GDP had risen by 0.3% in the three months to June while unemployment has fallen to 4.3%, its lowest level in more than 40 years.
This could lead to a rate rise sooner than anticipated by financial markets, should inflation continue to rise and the economy continue to perform well. The Bank said any increase would come at a gradual and limited pace.
Sharply rising inflation has put pressure on the MPC to increase the base rate in recent weeks, as households come under pressure from prices rising faster than earnings.
Increasing the base rate could lower inflation, and the Bank has a mandate to target a rate of 2%. Although GDP growth in the first months of the year was at the slowest pace since 2012, there are signs for a faster pace of expansion in the second half of the year.
Inflation is expected to increase further still in the coming months, according to the MPC, amid rising oil prices. It now expects the consumer price index to rise above 3% in October, which would force the governor, Mark Carney, to write to chancellor Philip Hammond with an explanation.
Given the uncertainty over the type of Brexit deal ministers will be able to strike with Brussels, the Bank said it must strike a fine balance between cutting inflation and maintaining its support for jobs and business activity through the cheaper cost of borrowing. It is also maintaining its £445bn quantitative easing programme.
The MPC said: “During the negotiation period, those economic implications would be influenced significantly by the expectations of households, firms and financial markets. [The Bank must] take account of these evolving expectations in setting monetary policy insofar as they affected the outlook for activity and inflation.”
After the departure of Kristin Forbes in June and the resignation of the Bank’s deputy governor, Charlotte Hogg, in March, the MPC was back to its full complement of nine members. Sir David Ramsden joined the committee, after his appointment as the Bank’s deputy governor for markets and banking.[“Source-theguardian”]