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Split in MPC over benchmark interest rates 'disappointing'

A LEADING Scottish economist has expressed surprise and ­disappointment over the decision of two members of the Bank of England's Monetary Policy Committee (MPC) to push for a rise in benchmark interest rates this month.

change: The Bank of England's MPC member Martin Weale was one of the two on the committee who voted for there to be a rise in interest rates.
change: The Bank of England's MPC member Martin Weale was one of the two on the committee who voted for there to be a rise in interest rates.

Minutes of the MPC's August 6 and 7 meeting, published yesterday, show that external committee members Martin Weale and Ian McCafferty voted to raise UK base rates by a quarter-point from their record low of 0.5 per cent. The other seven committee members voted for no change in rates.

This is the first split vote on rates from the MPC since July 2011, and breaks a pattern of unanimity on the committee under the chairmanship of current Bank of England Governor Mark Carney.

Jeremy Peat, visiting professor at Strathclyde University's ­International Public Policy ­Institute, said: "We have been waiting for a split. I think the timing is unexpected. I think it has come far earlier than I would have liked to have seen it and far earlier than expected, particularly given the way the wage data are running. I am surprised and a bit disappointed."

The Bank of England last week halved its forecast of nominal pay growth this year to 1.25 per cent, signalling an expectation that there will be another fall in earnings in real terms. Figures last week from the Office for National Statistics showed underlying year-on-year growth in average earnings of just 0.6 per cent in the second quarter, which is well adrift of the rate of annual UK consumer prices index inflation.

Data from the ONS on Tuesday showed annual UK CPI inflation had fallen from 1.9 per cent in June to 1.6 per cent in July, well below the two per cent target set for the MPC by the Treasury.

MPC members were not aware of this fall in inflation at the time of the August 6 and 7 meeting.

Although citing a belief that Mr Carney's authority had been "a touch damaged" by the MPC split, Mr Peat highlighted a view that Mr Weale and Mr McCafferty were "quite hawkish" in their approach.

Citing a lack of evidence of broadly-based UK growth, Mr Peat added: "I don't see a risk of inflation in the coming months. I think this is premature ... I personally see absolutely no reason, unless something remarkable happens, for any increase in interest rates this year."

Asked for his view on how things would pan out on the MPC from here, Mr Peat replied: "I hope we have two members having this view and the others will stick firm for some time to come."

He voiced concerns that the two votes for a rise in rates could, by heightening market expectations of an early increase in borrowing costs, boost sterling and thus hamper UK exporters. Sterling rose in the immediate wake of publication of the MPC minutes.

Scottish Chambers of Commerce also believes it is not yet time for a rise in rates. Garry Clark, its head of policy and research, said: "We remain of the view that it is still too soon for the Bank of England to begin raising interest rates. Since the [MPC's] last vote, [there has been news that] inflation has fallen back to 1.6 per cent and, according to some measures, real earnings have fallen."

He added: "The primary purpose of monetary policy is to control inflation and, with inflation well within the Government target of two per cent, current interest rates are achieving this goal. Whilst our economy is growing, there are few signs of overheating outside of the London property market. We believe that the recovery needs more time to bed in before the Bank takes the initial steps to begin returning interest rates to more normalised levels. The risks of acting too soon outweigh the risks of waiting a little while longer."

Mr Clark noted the majority in favour of retaining the current rates was substantial.

He added: "Economic indicators since the decision was made ought to have reduced the likelihood of an early change in policy. We do recognise that interest rates will have to rise at some point and businesses need to prepare themselves for that eventuality, but the question is when. The sensible answer, we believe, is 'not yet'."

Referring to Mr Weale and Mr McCafferty, the minutes state: "These members noted that the continuing rapid fall in ­unemployment, alongside survey evidence of tightening in the labour market, created a prospect that wage growth would pick up."

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