The Bank of Englands top economists today voted to hold interest rates steady, but with a reduced majority of six votes to three as chief economist Andy Haldane added his weight to the calls to tighten monetary policy.
The change of vote from Haldane will heighten expectations from City economists that the Bank is preparing to raise interest rates at its next meeting in August.
The Banks economists have repeatedly signalled that another hike is likely, following on from the first upwards move in a decade last November.
The Banks monetary policy committee (MPC) also announced today a change in its guidance on the unwinding of its massive stock of government debt. It will start to allow the pile to reduce when bank rate, its key interest rate, reaches 1.5 per cent, earlier than previous guidance of two per cent.
Bank rate remained at 0.5 per cent in May and at this weeks meeting, but the MPCs economists have signalled that the case for a rise is building. Haldane has not dissented from the committees consensus since joining in June 2014, while in earlier speeches other MPC members have pointed to rising wage pressures.
The Bank was forced to put off a widely expected rate rise in May after weak first-quarter GDP growth of only 0.1 per cent, but has indicated that it believes weakness was temporary, caused by bad weather. MPC members had taken “greater reassurance that the softness in the first quarter had been largely temporary,” said minutes of this weeks meeting, published today.
“There was widespread evidence that slack was largely used up,” the MPC said, meaning there is little room before a tight labour market prompts inflationary pressures. Higher oil prices and a weaker pound will also push inflation higher than forecast last month, the MPC said.
Meanwhile, on the changes to its quantitative easing guidance, the MPC judged that the effective lower bound – the point at which interest rate cuts are no longer stimulative – is “lower than in the past”, meaning that reducing the quantitative easing (QE) debt pile will happen earlier than previously thought.
The Bank also announced changes to its sterling monetary framework which will maintain the availability of central bank reserves for banks as the QE bond purchases unwind.
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