Bank holds rates steady despite fears of inflation
The Bank of England has kept interest rates on hold at 0.25%, but three policymakers called for a rise amid warnings that Brexitfuelled inflation is set to surge further over the summer.
Minutes of the latest decision by the Monetary Policy Committee (MPC) showed two members – Ian McCafferty and Michael Saunders – joined outgoing rate-setter Kristin Forbes in voting for a rise to 0.5%, marking 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% by the autumn.
This follows official figures earlier this week showing inflation surged to 2.9% in May, which was higher than expected and takes the Consumer Prices Index (CPI) further above the Bank’s 2% target.
The Bank said the pound’s weakness since last week’s shock 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 and energy soaring.
Minutes showed the MPC raising concerns that “inflation was projected to overshoot the target by more than previously expected and to remain above it throughout the three-year forecast period”.
But it said there were “arguments in favour of leaving the policy rate unchanged”.
“A slowdown in household consumption and gross domestic product as a whole had recently begun… although consumer confidence had held up, there had been further signs of a slowing housing market and new car registrations had fallen sharply,” the Bank added in the minutes.
Growth slowed more than the Bank expected, to 0.2% in the first quarter, but it believes this will be revised to 0.3%, while growth should edge up to 0.4% in the second quarter.
But the Bank warned it would not be able to offer much relief to cashstrapped households.
“Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years,” the minutes said.
The MPC vote result was unexpected by economists, with Ms Forbes, who is leaving the committee before the next rates decision, having called for a hike since March.
The minutes confirmed the Bank’s “tolerance of above-target inflation” has reduced as inflation jumps higher. It said it “stands ready to respond to changes in the economic outlook”, but added that all policymakers agreed that any increases in rates would be “at a gradual pace and to a limited extent”.
The Bank faces a difficult balancing act as it weighs up the needs of an economy weighed down by uncertainty over the Brexit negotiations, with rising inflation hitting consumers.
High street figures earlier on Thursday revealed more evidence that households are reining in their spending, with retail sales tumbling by a higher-than-forecast 1.2% in May, against a 2.5% rise in April.
This came after official jobs data on Wednesday showed average earnings, adjusted to account for the impact of inflation, fell by 0.6% year on year in the three months to April.
James Knightley, senior economist at ING, said rates were still unlikely to go up any time soon, in spite of the unexpected 5-3 vote.
He said: “The economic and political uncertainty, we believe, is too great to get a consensus behind higher rates.”
However, Ben Brettell, senior economist at Hargreaves Lansdown, said: “If inflation continues to surprise, we could see higher rates by the end of the summer.” STERLING climbed out of the red after a higher than expected number of Bank of England Monetary Policy Committee (MPC) members voted to raise interest rates yesterday. The pound surged 0.7% against the euro to 1.444, its highest level since the General Election. Versus the US dollar, sterling was up 0.05% at around 1.275.
In UK stocks, British Airways owner IAG saw shares dropped 20.5p to 584p as the company revealed that the major IT failure that caused travel chaos for tens of thousands of passengers last month will cost the company £80m.
Amec Foster Wheeler shares slumped 13.6p to 483p and Wood Group dropped 21.5p to 663.5p as both companies’ shareholders approved Wood Group’s £2.2bn takeover of the engineering and project management firm.
Majestic Wine shares tumbled 35.5p to 349.25p despite insisting that it is “past the tipping point” with its recovery plan, as investors focused on its annual pre-tax loss of £1.5m.
Shares in DFS Furniture plunged 52p to 200p as the sofa chain warned over profits, saying that an “uncertain macroeconomic environment” led to weak trading at its stores. DFS is forecasting full-year operating profit to be lower than market expectations and in the range of £82m-£87m.
The biggest risers on the FTSE 100 were Ashtead up 23p at 1,600p, HSBC Holdings up 6p at 686.7p, Royal Bank of Scotland Group up 1.6p to 251.5p, and London Stock Exchange Group up 23p to 3,655p.
The biggest fallers on the FTSE 100 were Fresnillo down 122p at 1,558p, Persimmon down 163p to 2,259p, Next down 264p at 4,037p, and Anglo American down 63.9p at 995.1p.