Well, that was unexpected. At a time when the UK economy is showing signs of slowing down, with the UK consumer showing signs of reining in its spending as inflation eats in to disposable incomes, the Bank of England upsets the market consensus by not voting unanimously to hold interest rates at current levels. The vote 5-3 to hold rates was a huge outlier and caught the market completely unawares.
While it wasn’t totally unexpected that outgoing MPC member Kristin Forbes voted to raise rates there was some doubt as to whether she would stick to her guns given the current political uncertainty and this week’s sharp widening in the gap between CPI inflation and wages.
As it turns out external MPC members Michael Saunders and Ian McCafferty joined her in voting to push rates back up to 0.5%, exactly where they were in August last year.
Ian McCafferty does have form on this having voted to raise rates on two previous occasions in 2014 and 2015, but Michael Saunders is a surprise, with the dissenters arguing that spare capacity was being used up and that growth in business investment and net trade was improving, which would help offset weaker consumption.
Today’s unexpected split has certainly caught the markets by surprise, and got a lot of the usual suspects expressing incredulity that certain members of the MPC could even consider raising rates, given how stretched the consumer already is.
Putting to one side the fact that the reason the UK consumer is stretched is primarily down to the Bank of England’s misguided rate cut last year, there could be another way of looking at this vote, and it could be down to current bearish sentiment towards the pound, and challenging the group think mindset that so prevails most central bank thinking.
With core prices already at their highest levels since 2012 and concern that further sterling weakness could exacerbate additional inflationary pressure this could well be a tactical move by the MPC to keep the markets off balance, as well as helping support the pound and attempt to keep a lid on inflation, which is higher than in it is in Europe where it does appear to be softening.
Ultimately the Bank of England hasn’t voted to raise rates and are unlikely to do so for quite some time, but in raising the possibility that they are thinking about it, the central bank may be looking at trying to put a floor under sterling, at a time when it is looking vulnerable.
It is also important to note that the voting dynamics are likely to change at the next meeting when the dissents are likely to go back to 2, though that does assume that the replacements for Kristin Forbes and Charlotte Hogg will maintain the status quo, and vote to keep rates as they are.
On the other hand I could be overthinking things, time will tell, but given this week’s data I can’t think of any other reason why we would get calls for a rate rise at a time when the economy is starting to look squeezed, and political uncertainty is high.
Maybe Bank of England governor Mark Carney will throw some light and shade on this and send the pound straight back down.
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