Minutes of the October meeting of the MPC revealed that dissenters, Martin Weale and Ian McCafferty, voted for a 0.25 percentage-point rise to 0.75% for a third successive month. The remaining seven members, however, including the Bank governor, Mark Carney, voted to leave rates unchanged at 0.5%, where they have been since March 2009, at the height of the financial crisis.
For the majority of the committee, low inflation of 1.2%, weak pay growth, signs that the recovery was losing momentum, and increased risks to the UK economy posed by the eurozone justified leaving rates on hold. They argued: “A premature tightening in monetary policy might leave the economy vulnerable to shocks, with the scope for any stimulus that subsequently became necessary being limited by the effective lower bound on Bank rate.”
Weale and McCafferty, however, argued that the MPC should look through low inflation, just as it had previously looked through high inflation pushed up by external price pressures. They argued that though growth in the eurozone had been “disappointing”, the UK had not been affected by damaging financial contagion. They also believed that wage growth might rise sharply as unemployment continues to fall.
“In the judgment of these members, even after a rise of 25 basis points in Bank rate, monetary policy would remain extremely supportive, and an early rise would facilitate the committee’s aspiration that any subsequent rises in Bank rate should be only gradual,” the minutes revealed.
Despite their arguments, financial markets have pushed their expectations of a first rate rise to the third quarter of 2015, from earlier expectations of a rise in spring.
Economists said the arguments put forward by the majority of the MPC would remain relevant in the coming months, leaving Weale and McCafferty increasingly isolated.
Samuel Tombs, senior UK economist at Capital Economics, said: “With the eurozone’s malaise unlikely to right itself quickly and inflation set to ease further over the coming months, it is hard to see what will trigger the MPC to raise interest rates over the next few months.
“Accordingly, while we maintain our view that Bank rate is likely to rise to only 1% by the end of next year, we now think that May, rather than February, is the most likely date for the first hike.”
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