Interest rates held but shock 5-3 vote sees sterling surge

● First time in more than six years that three MPC members vote for rate rise

The Bank of England (BOE) jolted financial markets yesterday when it revealed three members of its key monetary policy committee (MPC) voted for an interest rate hike – the closest it has come to raising rates since 2007.

The minutes of the June meeting of the MPC showed an unexpectedly finely-balanced vote of 5-3 in favour of keeping base rates at their current historically low levels of 0.25 per cent.

Against a backdrop of steadily rising UK inflation, the minutes showed that Ian Mccafferty and Michael Saunders joined former rate rebel Kristin Forbes in voting for a quarter-point rise.

The surprise voting split marked the first time that three members have dissented for more than six years. Their call comes as the Bank cautioned that inflation is set to rise more than it predicted in last month’s forecasts and is now likely to increase above 3 per cent by the autumn.

Inflationiscurrentlyatanear four-year high of 2.9 per cent. City economists were split yesterday on whether the MPC dissension means rates will be hoisted sooner than expected. James Knightley, senior economist at investment bank ING, said rates were still unlikely to go up any time soon.

“Given the BOE ‘looked through’ inflation at 5 per cent plus in 2008 and 2011, we think the committee as a whole will look through this spike too,” Knightley said.

“The economic and political uncertainty, we believe, is too great to get a consensus behind higher rates and with Kristin Forbes leaving the BOE this month, the hurdle to getting that consensus will soon be harder to achieve.”

But Ben Brettell, senior economist at broker Hargreaves Lansdown, said there was a chance of monetary tightening if inflation continues to rise.

Brettell said: “It seems the willingness of the MPC to ‘look through’ higher inflation and leave rates on hold is wearing thin, and if inflation continues to surprise we could see higher rates by the end of the summer.”

On the currency markets, sterling, which had been trading below $1.27 before the MPC minutes were released, surged to almost $1.28, while the stock market’s blue-chip Footsie index closed off 0.7 per cent, or 55 points.

Rates were slashed from 5.75 per cent to just 0.5 per cent between December 2007 and March 2009 in the wake of the financial crash and recession. They were cut by another quarter-point last summer shortly after Britain’s shock Brexit vote

Yesterday’s update followed official data earlier this week showing that inflation surged in May beyond City expectations, putting it well above the Boe’s mid-term target of 2 per cent.

The Bank said the pound’s weakness since the indecisive general election result would add to the pressure on inflation as sterling’s fall since the Brexit vote has sent the cost of imported goods soaring.