MPC comes close to raising interest rates in June meeting
Minutes from the latest Monetary Policy Committee meeting (MPC) surprised the market as policymakers came the closest to a rate rise since 2011, announcing a 5 to 3 vote for maintaining UK interest rates at 0.25%. Data presented led three committee members (Kristin Forbes, Ian McCafferty and Michael Saunders) to vote against the proposition to leave rates unchanged, preferring instead to increase Bank Rate by 25 basis points. However five committee members (the Governor, Ben Broadbent, Jon Cunliffe, Andrew Haldane and Gertjan Vlieghe) felt that the UK economy’s recent weakness would keep inflation under control. Existing quantitative easing stimulus also remained unchanged as the committee voted unanimously to maintain its quantitative easing (QE) programme, with the purchase of £10 billion non-financial investment grade corporate bonds and the purchase of £435 billion UK government bonds.
The Bank of England's Monetary Policy Committee (MPC) is tasked with maintaining inflation around a 2% target through the use of monetary policy, with the objective of sustaining growth and employment. The MPC meets eight times per year to set interest rates and did so on June 14 this month. In that meeting, data presented showed that inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation following the vote to leave the European Union (EU). Inflation, as measured by CPI, reached 2.9% in May, above previous expectations. The MPC now expects that inflation could breach 3% by the autumn, cautioning that it is likely to remain high while the inflationary impact of a prolonged sterling depreciation feeds its way into the prices of consumer goods and services.
Commentary
The more hawkish tone of recent MPC meetings shows increasing discomfort about the rate at which inflation has and is rising since last June's vote to leave the EU. This is not the first time that inflation figures have exceed expectations in recent times and the disagreement between policymakers reflects the difficulties that are presented for central banks when trying to normalise a monetary policy structured on record low interest rates.
The MPC will show increasing discomfort should inflation continue to overshoot expectations and we'd expect if the trends persist for continued disagreement. The challenge faced is the potential of higher unemployment and weaker income growth that could present themselves should interest rates be increased in attempts to counterbalance a weaker sterling. However, a rise to 0.50% wouldn't necessarily exert such a hugely detrimental effect given that the market previously operated for years at that level and it's expected that its this challenge that is causing disagreement among policymakers.
Kristin Forbes has voted for an increase to the base rate since earlier this year but she steps down this month. For a rate rise to occur, the MPC will need at least four members (or five should Kristin be replaced immediately) to vote in favour, something that is viewed as unlikely at the present point in time.
Despite this, savings rates are creeping upwards with one year fixed term bond rates recovering, now matching similar rates as those offered in May of last year, as the market expects interest rate rises to be on the horizon. Should you wish to discuss the most appropriate cash home please give us a call and we'll be happy to help.