BOE holds rates but split vote sets stage for May increase

BOE governor Mark Carney and his colleagues surprised markets by saying last month that rates may need to go up faster than expected due to a strong global economy and an inflation rate that is running uncomfortably above target.
BOE governor Mark Carney and his colleagues surprised markets by saying last month that rates may need to go up faster than expected due to a strong global economy and an inflation rate that is running uncomfortably above target.PHOTO: REUTERS

LONDON • The Bank of England (BOE) kept interest rates steady yesterday but two policymakers unexpectedly voted for a hike, boosting confidence among investors that borrowing costs will rise in May for only the second time since the 2008 financial crisis.

Mr Ian McCafferty and Mr Michael Saunders - the first officials to call for rates to rise last year - said it was now time to push them above the emergency level at which they have sat for most of the past decade.

The world economy is growing at its fastest since the financial crisis, helping Britain at a time when it is suffering from uncertainty about Brexit.

The United States Federal Reserve on Wednesday raised rates for the sixth time since the financial crisis. Even the European Central Bank - which is still struggling with anaemic price growth - has its eye on phasing out its massive bond purchases.

The BOE's Monetary Policy Committee voted 7-2 to keep rates at 0.5 per cent, but said "ongoing tightening" was likely to be needed to return inflation, which stood at 2.7 per cent last month, back to its 2 per cent target.

"The message from the Bank of England to borrowers couldn't really be clearer: Get ready for higher rates now," said Mr Ed Monk of fund managers Fidelity International.

Financial markets were relatively indifferent, though sterling did briefly touch a nine-month high against the euro.

Investors had priced in a 70 per cent chance of a May rate rise even before yesterday's statement, and they see a similar chance of an additional rate increase later in the year.

Last month, BOE governor Mark Carney and his colleagues surprised markets by saying rates may need to go up faster than expected due to a strong global economy and an inflation rate that is running uncomfortably above target.

Yesterday, the BOE said economic developments since then broadly backed up this view.

"Given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target," it said.

The BOE raised rates for the first time in over a decade last November, reversing an emergency cut when the economy appeared to be going into shock after Britain's June 2016 Brexit vote.

Since then, growth has held up better than expected - though last year, the British economy lagged a global upturn as high inflation caused by sterling weakness since the referendum ate into households' disposable income.

But data on Wednesday showed pay growth at its highest since 2015, which the BOE said bolstered policymakers' certainty that domestic cost pressures were building, hampering inflation's return to target.

Also on Wednesday, the government announced a 6.5 per cent pay rise for more than a million public health workers over the next three years, breaking with seven years of pay restraint.

REUTERS

A version of this article appeared in the print edition of The Straits Times on March 23, 2018, with the headline 'BOE holds rates but split vote sets stage for May increase'. Print Edition | Subscribe