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MPC split decision

Bank holds interest rate but hints at August rise

Bank of England

Bank of England rate-setters were split (pic: Terry Murden)


 

The Bank of England’s monetary policy committee voted to keep interest rates unchanged at 0.5%, but a split decision hinted at a rate rise in August.

Chief economist Andrew Haldane joined two other members of the committee who voted for an immediate rate rise to 0.75%.

Analysts, however, believe the economy will have to show some signs of stronger expansion in the economy for a rise to be implemented.

Nick Dixon, investment director at Aegon, said: “With global trade concerns, continued Brexit uncertainty and subdued domestic activity, today’s MPC decision to hold rates is unsurprising.

“Looking further out, two factors will be critical for inflation and hence interest rates. First, the quality of Brexit, especially the eventual trade deal, will impact the level of sterling and hence inflation.

“Second is the labour market and whether wage pressures become embedded and create ‘cost push’ inflation. If sterling continues to depreciate and wage increases lead to higher prices, there will be pressure for interest rates to rise higher and faster than markets currently expect. 

“In this context, Aegon is cautious about fixed interest particularly government bonds, which will likely come under increasing pressure as inflation and interest rates rise.”

Ed Monk, associate director for Personal Investing at Fidelity International, said: “With recent data showing UK CPI at 2.4% – above target but below recent highs – and wage growth also being pegged back, there was no chance of a shock rise this week.

“The Bank of England does, however, appear to be standing firm on its desire to hike rates in August, even in the wake of recent weaker than expected economic data. After abandoning its widely signalled rate hike in May, Mark Carney [governor] is determined to shake off the moniker of the ‘unreliable boyfriend’ if he can. 

“A majority of economists expect a rise in August and there was nothing in the Bank’s comment today to dissuade them. A tightening of the MPC vote to 6-3 indicates the hawkish direction. The Bank said that it expects the dip in GDP growth to be temporary, meaning its central case of gradual tightening from here remains in place.”

 



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