Bank of England likely to keep rates on hold for sometime

The unexpected decision of three members of the Bank of England’s rate-setting committee to vote for an immediate hike in the interest rates by a quarter point provided a hawkish conclusion to the June MPC meeting. Kirstin Forbes maintained her call for an immediate hike in the rates was joined by Michael Saunders and Ian McCafferty.

Indeed previous MPC minutes had trailed the likelihood of such an outcome, with recent MPC minutes stating that it will not take much further upside news on inflation to urge “some” other members to vote likewise. The fact that three policymakers of the central bank were ready to advocate an immediate move in the present environment speaks to the increased concern over the inflation outlook. With data last week indicating headline inflation running at a four-year high of 2.9 percent, the Bank of England’s tolerance for maintaining policy extremely loose to underpin economic growth is being tested.

Meanwhile, the labor market continues to tighten. The jobless rate has dropped to just 4.6 percent, its lowest since the mid 1970’s. The ratio of unemployed to vacancies is at its lowest on record. Increasing capacity restrains and a likely easing of the public sector pay freeze risk pushing wage growth higher. And, while consumers might face a rocky ride in the months ahead, the Bank of England is relatively positive that other areas of demand might help counter the impact.

As always, economic developments would dictate how the Bank of England responds. Currently, there seems like prospect of any immediate increase in interest rates. The softness of underlying wage growth and the uncertainties around the U.K.’s planned EU exit are expected to persuade the majority of the MPC to keep rates unchanged, noted Lloyds Bank in a research report.

However, the risks have moved. If inflationary pressures continue to build, and the economy emerges from recent uncertainties relatively unharmed, a recalibration of the BoE’s monetary policy response function would possibly urge a rate hike much sooner than markets expect at present, which is in mid-2019. Currently, there is just too much uncertainty to justify changing the central forecast for U.K. Bank rate.