The UK inflation rate falling well below target should allow the Bank of England to stay relaxed about keeping the base rate at a record low for longer. Still, volatility may hit the markets if the BoE surprises with a minority rate hike vote.
The general consensus among analysts points to no change to the voting pattern at Bank of England's (BoE) nine-member rate-setting committee in August. However, speculations ahead of the Monetary Policy Committee (MPC) minutes suggest a minority of policymakers could have voted for a rate hike given the current strength of growth and jobless rate falling sharply below BoE threshold.
This may or may not be surprising given the fact there has already been some disagreement at the BoE between June 2010 and July 2011 when, at times, as many as three MPC members had voted for a rate hike. One of those was Martin Weale, considered as one of the most hawkish policymakers. Since then, the committee has remained unanimous on rates.
However, the latest official data showed inflation again slowed markedly in July, which should ease off pressure from policymakers and offer them some leeway to keep the base rate at a record low for longer as upward price pressures remain subdued. But the Consumer Price Index data the officials had in their hands when voting this month were from June, when the inflation rate had spiked suddenly and nearly hit the price target.
On the possibility of a split among the MPC members, Capital Economics analysts wrote ahead of the release today that they "would not be surprised if a number of members of the MPC voted for rate hikes earlier this month," given the August’s Inflation Report (IR) stated that there was "a wide range of views on the Committee about the likely degree of slack" in the economy.
The BoE's central view now points to 1% of labor market slack, against 1% to 1.5% the bank had predicted in May. The BoE said it chose one numerical variable this time in order to communicate the figure in a clearer way but, at the same time, said the level of uncertainty behind that figure increased since the previous round of forecasts.
On market volatility, Capital Economics team added that "if the minutes … reveal that some members voted to raise interest rates earlier this month, short-term gilt yields may rise and sterling strengthen. But over the next few years, we think that gilt yields will increase only slowly and there is actually scope for sterling to fall against the US dollar."
Wage growth confusion
In its August IR, the BoE sharply slashed the 2014 annual wage growth estimate by a half, from 2.5% down to 1.25%. The UK significantly weak wages have become significant data after the top BoE policymakers, including Governor Mark Carney, made numerous explicit references to earnings being one of the primary variables for measuring cost inflation and its strength determining the time-frame of the policy tightening.
Despite putting too much emphasis on earnings before and during the August IR, Carney flip-flopped again in an interview on August 17 when he said the central bank was not bound to wages when it came to a rate increase. "We have to have the confidence that real wages are going to be growing sustainably (before rates go up). We don’t have to wait for the fact of that turn to do so," Carney said in the Sunday Times interview.
According to the latest available logs from the MPC meeting in July, it is clear there has been a group of less dovish policymakers at the MPC who "saw the risk of a small rise in rate derailing the expansion ... was receding, as that expansion became more established." Let's wait and see if that hawkish sentiment translated into a real split at the MPC round-table.
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