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BoE hawks revert to status quo on rate rise

The Bank of England hawks have removed their opposition to holding interest rates at record lows, with the Monetary Policy Committee voting unanimously to keep the Bank rate at 0.5 per cent.

For the past six months, committee hawks Ian McCafferty and Martin Weale have voted in favour of a 0.25 percentage point rise in the rate. However, at the latest MPC meeting in early January, the status quo continued without dissent.

The hawks’ decision was “finely balanced” this month, according to the minutes. They say: “They believed that the sharp fall in inflation to below the 2 per cent target was probably driven largely by temporary factors and was unlikely materially to affect the behaviour of households and businesses in such a way that it became self-perpetuating. 

“They also noted the most recent evidence that wage growth was more buoyant than expected.

“Nevertheless, they noted the risk that low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank rate at the current juncture.”

The spike in volatility and the “sizable moves” in asset prices that accompanied it reflect the greater geopolitical uncertainty in Greece, Russia and the oil markets, the committee minutes say.

Ten-year sovereign yields contracted by 30 to 40 basis points in the UK, Germany and US, while Greek yields have ballooned by 3 percentage points.

Meanwhile, inflation expectations have fallen, with the UK RPI swap rate dropping by 25bps to its long-term average of 3.1 per cent.

The committee felt the outlook justified maintaining both the current level of Bank rate and the stock of asset purchases financed by the issuance of central bank reserves.

The minutes say: “It was possible that the risks to CPI inflation in the medium term might have, if anything, shifted to the upside, but all members were also alert to the downside risk of current low inflation becoming entrenched.”



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