Bank of England splits over rate hike for first time in three years

Wed Aug 20, 2014 8:29am EDT
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By David Milliken and Andy Bruce

LONDON (Reuters) - Bank of England policymakers broke ranks over interest rates for the first time in three years this month, when two unexpectedly voted to tighten policy and revived speculation about a 2014 rate hike.

Former academic Martin Weale and business economist Ian McCafferty both voted to raise interest rates to 0.75 percent from 0.5 percent, according to minutes released on Wednesday of the nine-member Monetary Policy Committee's meeting on Aug. 6-7.

Their dissenting votes ended the longest period of unanimity in the MPC's 14-year history. Sterling rebounded from a four-month low and government bonds fell as expectations for an early rise in British interest rates were revived.

Last week, the BoE slashed its forecasts for wage growth for 2014 and said it did not want to raise rates until stronger wage rises looked imminent - a view shared by the majority of the MPC in Wednesday's minutes.

But Weale and McCafferty believed recent declines in unemployment suggest wage growth could accelerate, and that the economy was running at close to capacity and rates needed to rise now.

"Since monetary policy ... could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising the Bank Rate in advance," they said.

They added that an early rate rise would help ensure that future increases were gradual.

Weale has a record of hawkish positions on monetary policy. He backed rate rises in 2011 and opposed introducing forward guidance in August last year on the grounds that it lacked strong enough safeguards against high inflation.   Continued...

Pedestrians walk past the Bank of England in the City of London May 15, 2014.  REUTERS/Luke MacGregor