LONDON – The Bank of England’s consensus on maintaining record-low interest rates has crumbled after more than three years, with two members of the central bank’s monetary policy committee voting to increase borrowing costs this month.
While the nine-member committee kept its benchmark bank rate at 0.5 per cent, Ian McCafferty and Martin Weale voted to increase the rate by 0.25 percentage points as economic growth has picked up in pace, according to minutes of the Aug. 6-7 meeting released Wednesday.
Economists had been speculating in recent weeks that the unanimity on the committee had been eroding as the economy grew stronger and inflation remained tame. The push to raise rates in Europe’s third largest economy comes even as other major central banks — such as the Federal Reserve and the European Central Bank— are still pursuing monetary stimulus.
News of the split caused the pound to jump almost half a cent against the dollar, to $1.6645, as higher rates tend to boost a currency. British stocks fell, with the main FTSE 100 index shedding 0.5 per cent on the prospect that credit might tighten earlier than thought.
The minutes show Bank of England policymakers were divided about how much spare capacity remained in the British economy as unemployment has dropped quickly but wage growth remains weak.
McCafferty and Weale argued the Bank of England should act preventively by starting to raise rates before the rapid decrease in unemployment spurs demands for higher wages, the minutes show. Britain’s unemployment rate dropped to 6.5 per cent in May from 7.2 per cent at the end of 2013 as economic growth has accelerated to its fastest pace since 2007.
According to the minutes, the two dissenters argued that “even after a rise of 25 basis points in Bank Rate, monetary policy would remain extremely supportive.” Acting early would allow the Bank of England to move gradually, they said.
The other seven members of the committee said there wasn’t enough evidence of rising inflation or wages to justify an immediate rate increase. In fact, inflation fell back to 1.6 per cent in July after rising to 1.9 per cent in June. The monetary policy committee forecasts that inflation will remain slightly below the central bank’s 2 per cent target for the next two years, according to the minutes.
The members who sought to keep rates on hold also noted that a premature interest rate increase might threaten the economy’s recovery following Britain’s worst recession since the 1930s.