Four out of the nine members of the Bank of England’s Monetary Policy Committee (MPC) voted to raise the interest rates in June, and with such a slim majority vote it looks highly likely that rates will rise once more in either July or August.
Ian Kernohan, economist at RLAM, confirmed that it is definitely now a case of when and not if: I had expected a 6/3 vote but it was actually a little tighter than that. One of the main arguments in favour of June rise was that since a rate rise was already sanctioned in the May Inflation Report, there was no point in waiting.
While todays news increases the chance of a July move, the more important debate is not whether its July or August (we know rates are going up) but where rates are likely to peak relative to what is priced into the market.
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How far are the MPC prepared to go, bearing in mind the lags involved between raising rates and their effect on the economy? I expect one more rise will be enough and the risks to growth and interest rates next year remain to the downside.
Simon Ward, chief economist at New Star Asset Management, agreed, although expressed his displeasure that the MPC are staggering the expected hikes: It is disappointing that the MPC passed up the opportunity to deliver a clear message by raising rates in June. Our MPC-ometer had predicted a close vote, but suggested the hawks would just win out.
The MPCs own forecasts showed that a further rate rise was needed, and incoming news on growth, inflation and monetary trends provided little reason to delay. The majority decision to hold was partly tactical, reflecting concern that an unexpected hike would hit markets. However, the baby-step approach risks allowing an inflationary psychology to take hold, implying a higher eventual peak for interest rates.
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