BoE policy split deepens as 3 officials seek rate increase

LONDON • The split among Bank of England (BoE) policymakers widened this month as two officials joined Kristin Forbes in her call for a rate increase, warning that inflation could rise more than previously thought.

In the biggest division on interest rates in six years, the Monetary Policy Committee (MPC) voted by five members to three to maintain the key interest rate at a record-low 0.25%. Michael Saunders and Ian McCafferty broke ranks to demand an immediate hike to 0.5%.

The pound jumped after the decision and was up 0.24% at 1.2781 as of 12:06pm London time yesterday. Bonds fell, with the 10-year gilt yield rising nine basis points to 1.01%.

The unexpected shift comes against an uncertain backdrop for the UK, with real earnings falling, consumer spending weakening and Prime Minister Theresa May un-
expectedly losing her parliamentary majority after calling a snap election.

At the same time, recent data have shown inflation accelerating faster than the central bank projected just last month, with the rate now at 2.9%.

Citing the pound’s recent decline, the BoE said inflation could overshoot the 2% target by more than previously thought. The three hawks also said that slack in the labour market appeared to have diminished.

For the majority, reasons for keeping policy unchanged included slowing consumer spending and economic growth.

“It was too early with confidence how large and persistent” that slowdown would be, the MPC said in a statement alongside the policy announcement.

The BoE decision came hours after the US Federal Reserve raised interest rates for a second time this year and chair Janet Yellen indicated she’s pressing on with normalising monetary policy.

It suggests the BoE may be beginning to edge in that direction, though Brexit and the cooling economy mean that its progress is likely to be cautious. The MPC said any rate increases will be at a “gradual pace and to limited extent”.

The BoE’s comments are the first 
in more than month from policymakers, who were in a quiet period during the election campaign.

The outcome of the UK vote complicates the prospects for Brexit talks. When the BoE updated its economic forecasts last month, it assumed that Britain’s adjustment to a new relationship with the European Union will be “smooth” — avoiding a so-called cliff edge. — Bloomberg