Bank of England keeps rates on hold but edges closer to a rise

The Bank of England, LondonBen Stansall/AFP

The Bank of England has held interest rates at record low in June, although a growing number of the bank committee members favour a hike.

The bank's monetary policy committee (MPC) voted in favour of holding steady on the 0.25% base rate by a surprisingly close split of five to three. Rates were cut in the aftermath of the UK's EU referendum last summer.

Kristin Forbes, an external committee member, has long voted for an immediate interest rate rise, but was joined by Michael Saunders and Ian Mccafferty.

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Bank of England Governor Mark Carney and four other members of the Monetary Policy Committee voted to leave rates unchanged.

All of the interest rate-setting MPC agreed that the "inflation overshoot relative to the [2%] target [of the Bank] could be more pronounced than previously thought".

However, the MPC was unanimous in its decision to keep the rate of government bond purchases unchanged at £435bn ($554.4bn) and corporate bonds at up to £10bn.

The moves comes after the US Federal Reserve raised American interest rates late on Wednesday (14 June) and - notwithstanding some softening domestic data - signalled it is likely to raise rates once more this year.

Economists were taken aback by the close nature of the vote, which saw the pound rise against the dollar and the euro after the announcement.

Think Markets Chief Market Analyst Naeem Aslam said: "The vote of 5-3 between the MPC members is something of shock which shows that there is some disagreement in the committee and this has pushed the GBP higher.

"We have so much uncertainty in the market and it is shocking that some members think they should increase the interest rate."

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Hargreaves Lansdown senior economist Ben Brettell said: "Set against a backdrop of disappointing retail sales, slowing growth, shrinking real wages and heightened political uncertainty, it was somewhat surprising that three MPC members voted for higher rates at this week's policy meeting.

"It seems the willingness of the MPC to 'look through' higher inflation and leave rates on hold is wearing thin, and if inflation continues to surprise we could see higher rates by the end of the summer."

Rate rise on the cards

The bank's decision comes against a backdrop of against the backdrop of political uncertainty following this month's general election, slowing economic growth and rising inflation.

Average wages pay growth slowed from 1.8% to 1.7% in the year to April, said the Office for National Statistics (ONS) earlier this week. Total pay growth, which includes bonuses, slowed from 2.3% to 2.1%.

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The wage growth slowdown is particularly painful because inflation has been driven up by the falling value of the pound since last year's Brexit vote.

The rising cost of foreign package holidays and imported computer games helped to push the UK inflation rate up to 2.9% last month from 2.7% in April.

The latest inflation rate is the highest since June 2013, and above the Bank of England's 2% target.

The Office for National Statistics said GDP grew just 0.2% in the first quarter of 2017 as consumer spending, the engine of the UK economy slows. This is a marked change of pace from the 0.7% growth in the final three months of 2016.

Britain's economy was the worst performer among the world's top seven advanced economies in the first quarter of this year as the effect of higher inflation caught up with consumers at a time of sluggish wage growth.

UK growth prospects

But the central bank said it was unclear how lasting this weakness would be, as consumer confidence remained solid. Moreover, indicators of investment and exports looked upbeat, and unemployment was its lowest in over 40 years, the BoE said.

"The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC's tolerance of above-target inflation," the BoE said.

"Looking ahead, key considerations in judging the appropriate stance in monetary policy are the evolution of inflationary pressures, the persistence of weaker consumption and the degree to which it is offset by other components of demand."

The last time three MPC members voted for a rate rise was in 2011 - when there were nine members serving on the MPC - and the last time a single vote could have swung the decision on rates was in June 2007 when the committee split 5-4.

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