The Bank of England has decided to maintain interest rates at their current record level, but in a surprise move three of the policy makers voted for a rise.
The Bank’s Monetary Policy Committee voted by a majority of 5-3 to maintain the Bank Rate at 0.25% – the closest it has come to raising rates since 2007.
Ian McCafferty, Michael Saunders and Kristin Forbes all voted to hike the interest rate by 25 basis points to 0.50%. Forbes has been the only member of the committee to vote for a rise in the previous two meetings.
The Committee once again voted unanimously to maintain corporate bond purchases at £10 billion and UK government bond purchases at £435 billion.
The decision comes after inflation hit a four-year-high of 2.9% in May – well above the bank’s target of 2%.
In the minutes of the meeting the Bank said that the driving force behind the rise in inflation has been the fall in the value of sterling since leaving the EU.
It warned that the inflation overshoot relative to the target could be more pronounced than previously thought.
The minutes said inflation could rise above 3% by the autumn and is expected to remain above the 2% target for an extended period as the fall in sterling continues to feed through into the prices of consumer goods and services.
The minutes noted that a number of indicators of domestically generated inflationary pressure had also increased over recent months.
“But there were also arguments in favour of leaving the policy rate unchanged. A slowdown in household consumption, and GDP as a whole, had recently begun, and it was too early to judge with confidence how large and persistent it would prove to be,” the minutes said.
“Although consumer confidence had held up, there had been further signs of a slowing housing market and new car registrations had fallen sharply. It was as yet unclear to what degree weaker consumption would be offset by other components of demand. A period of slower than expected growth could see a margin of slack re-opening. Wage growth had remained subdued, despite low unemployment.
“Different members of the Committee placed different weights on these arguments. On balance, for five members, the current policy stance was still appropriate to balance the demands of the Committee’s remit.”
Howard Archer, chief economic adviser to the EY Item Club, said that despite the closeness of the June vote, it was far from certain that interest rates will rise in the near term.
“There still looks to be a very real possibility that the Bank of England will hold off from raising interest rates in 2017. A tightening in 2018 is also far from certain given the cloudy economic and political outlook,” he said.
“With the UK economy stuttering, economic and political uncertainty magnified by the election result and earnings growth very weak, a compelling case can still be made for the Bank of England to hold off from any interest rate hike – not just now but for some time to come.
“The UK economy looks to be finding growth hard to come by again in the second quarter following GDP growth of just 0.2% quarter-on-quarter in the first quarter. Furthermore, a deepening squeeze on consumer purchasing power and increased economic and political uncertainties – including the imminent start of Brexit negotiations -facing businesses will likely hamper growth over the coming months.”
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