BoE governor has presided over his first split vote. However, the two members who voted for a rate rise are unlikely to be joined by others for a while yet.
August 21, 2014: The minutes of the Bank of England monetary policy meeting on August 6-7 showed that the committee voted 7-2 in favour of keeping Bank Rate at 0.5% with Martin Weale and Ian McCafferty voting for a 25bp interest rate rise. This is the first time that there wasn’t a unanimous decision in just over three years. The committee voted 9-0 in favour of leaving QE at £375bn.
The two dissenters argued that “the degree of spare capacity had diminished sufficiently” and that a tightening labour market “created a prospect that wage growth would pick up”. They also noted that wages were a lagging indicator and “it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them”. Even after a 25bp rate rise, they argued that “monetary policy would remain extremely supportive”. It would also help facilitate the MPCs “aspiration that the rises in Bank Rate should only be gradual”.
However, the majority still need a fair bit of convincing. The minutes stated that “for most members, there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate”. They felt that the rate of growth would moderate while inflation was expected to “reach the 2% target only at the end of the three-year forecast period”. They also cited weak wages and the possibility of labour market slack may have been greater than previously thought. By delaying rate hikes, it would “allow the expansion to become more entrenched”. Indeed, raising rates too early in the absence of wage rises could increase “the vulnerability of highly indebted households”, while also adding to upward pressure on sterling.
We suspect that Weale and McCafferty will remain in the minority for a while yet. The low inflation numbers, the lack of wage growth and concerns about Eurozone growth – the UK’s largest trade partner – suggest that in the absence of upside activity data shocks, the majority will continue to opt for status quo in the next few months. Indeed, it currently looks more likely to be February when we see the first rate rise than our current published forecast of November.
Nonetheless, we think that the market is being too cautious in terms of potential policy tightening. The MPC-dated Sterling Overnight Interbank Average Rate (SONIA) forward is currently pricing in around 19bp of tightening by the February MPC meeting and just 38bp by June. We would suspect the BoE would likely be raising rates by 25bp a quarter which would put June at 50bp. As such, we remain upbeat on the prospects for sterling, particularly against the euro, given little prospect of ECB policy tightening within the next 18 months. We look for EURGBP to fall to 0.78 by year end.