Surprise MPC Vote
The Bank of England (BOE) surprised no one by keeping interest rates the same at 0.25% but the Monetary Policy Committee (MPC) did not disappoint as it was revealed that three members of the monetary policy committee voted for a rate hike. Bearing in mind that CPI for May came out at 2.9% the highest since July 2013 this move is not very clear for market analysts.
Ian McCafferty and Michael Saunders joined Kristin Forbes in voting to raise rates to 0.50% with the other five members of the committee voting to keep rates where they currently are.
The last time there were three votes amongst the MPC to raise rates, was back in 2011. Inflation has been rising far quicker than anticipated due to the rising costs of importing goods into the UK. This is because the sterling has been lower than its rivals since last year’s Brexit vote.
With the BOE’s inflation target at 2% and with the recent Consumer Price Index (CPI) coming in way above that target at 2.9% which is nearly a 4 year high, there is speculation that it will not be long till it moves above 3% and then there will be calls for the BOE to act.
There is also another argument that the MPC might be inclined to raise rates sooner than later, as in their minutes, they indicated that due to the improving labour market, the time to raise rates might soon be at hand.
The initial effect of the BOE decision on the sterling and the FTSE100
When the MPC vote was announced, the Sterling bounced off its sessions lows and attempted to break a key level of 1.28 against the USD. It was unable to do so but at the time of writing, it does remain above the previous day’s trading close. The FTSE100 reacted initially in the opposite direction suffering its worst day in 11 months. It has since recovered slightly and at the time of writing was trading around 7395.30.
Will the BOE raise rates in the immediate future?
Let’s start off but looking at the UK economy and how it is performing. GDP growth in Q1 of 2017 was 0.2%. In 2016, the UK economic growth rate was the second-fastest amongst its fellow G7 countries, despite the fall out of the Brexit, with the GDP per head now return to pre-recession levels.
The UK’s current unemployment rate is at 4.6% with weekly earnings growth up to April this year at 1.7%. The service sector is steaming ahead and has actually passed the pre-recession levels and UK consumer confidence is holding steady.
With the aforementioned inflation level at 2.9%, all the above suggests the possibility that the BOE might indeed jump in and raise rates in the immediate future.
However, one of the key driving factors in the UK economy and its recovery is consumer spending. Retail sales fell in May by 1.2% indicating that the consumer is feeling the pinch from the higher inflation levels. In addition, there is major political uncertainty in the UK; the election fiasco, upcoming Brexit negotiations and the fact that there signs of a UK economic slowdown.
Ms. Kristin Forbes will also be leaving her position on the Monetary Policy Committee on the 30th June, so there will be one less vote towards a hike.
Because of all these facts, in my opinion, we will not see a rate hike by the BOE in the next two years. It would take a very brave Monetary policy committee to make a decision to act. Sometimes it is better to wait for the dust to settle so you can see your path more clearly.