Ian McCafferty voted to increase Bank Rate by 25 basis points, given his view that demand growth and wage pressures were likely to be greater, and the margin of spare capacity smaller, than embodied in the Committee’s collective August projections.
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The euro surged against sterling yesterday after the Bank of England unexpectedly signalled that a possible rise in interest rates will be later rather than sooner.
The BoE slashed interest rates to 0.5 percent in the depths of the financial crisis in 2009 and has kept them there since. Finally, it was revealed that industrial and manufacturing production growth missed loft expectations and only saw increases of 1.5% and 0.5%, respectively.
Mr. McCafferty judged a rate rise was needed to keep inflation in check and to ensure that future rate rises stay smooth and gradual, the minutes record. The last time CPI was on target was December 2013.
Central to the lack of urgency on raising rates is the strength of sterling, which earlier this week touched its highest level in more than seven years against a basket of currencies.
He said BoE Governor Mark Carney had not given an explicit message about a late-2015 rate hike in a speech last month, contrary to some media reports which interpreted it that way.
For the months ahead inflation will hold close to zero.
He said: “This is not just about inflation, but inflation in the medium term, so people can enjoy the dividend of lower petrol and food prices without worrying about the pay back”.
Mr Carney accepted that the likelihood of a rate increase was drawing nearer, but he added, “The exact timing of the first move can not be predicted in advance; it will be the product of economic developments and prospects”. ‘Analysts had fully expected the MPC to be split 7-2 in favour of leaving interest rates on hold this time around – as such the 8-1 verdict came as a shock.’. Nevertheless, inflation in two years’ time is still seen as returning to the official 2 per cent target.
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But the Bank revised down its employment growth estimates for this year, resulting in a stronger productivity performance in 2015 than previously expected by Threadneedle Street. “Could this prompt others to follow his lead in coming months?” The pound strengthened as Bank of England policy makers met to vote on interest rates before they release an unprecedented flow of central-bank data on what’s being dubbed “Super Thursday”. The Bank of England’s economists recent found that American swap rates were responsible for a number of movements in UK mortgage rates.
