Bank of England policymakers voted unanimously to leave borrowing costs on hold this month, but two members of the monetary policy committee saw the decision as “finely balanced”, shortening the odds on a rate rise in the coming months.
Minutes published on Wednesday showed that two anti-inflation hawks – likely to be Martin Weale and Ian McCafferty, who voted for higher rates through late 2014 – were again contemplating a rise, despite suggestions that wages would not grow as fast this year as previously expected.
The news led City analysts to suggest the MPC is inching towards tightening policy. “Overall, the only way is up for interest rates – but not yet. The tone from the MPC seems to be taking baby steps in the hawkish direction,” said Alan Clarke, of Scotiabank.
The improvement in the outlook for the eurozone economies, where a €60bn-a-month money creation programme is under way, appeared to be a key factor influencing the MPC.
“Although it was too early to be confident, a succession of firmer data suggested that growth in the euro-area economy was picking up, supported by a confluence of factors – improving credit conditions, a recovery in confidence, a lower oil price, accommodative monetary policy and a weaker currency,” the minutes said.
But in Britain the MPC said disappointing wage settlements – a key factor in determining the outlook for inflation – had caused it to reduce estimates for pay growth over 2015 as a whole from 2.6% to 2.3%.
That finding chimed with a separate survey showing only a fifth of workers expected their pay to rise by 2% or more this year, while as many as a third expected a pay freeze. Just one in 10 of the almost 2,000 workers polled by Ipsos Mori for Markit expected a rise of 3% or more.
Markit’s chief economist, Chris Williamson, said: “The Bank of England is currently forecasting the economy to grow by 2.9% this year, fuelled by consumer spending rising on the back of higher real employee earnings. The worry is therefore that weak pay growth means the economy is reliant on ultra-low inflation to boost consumer spending power.”
With inflation falling to zero in February and March, after the plunge in global oil prices, the MPC minutes acknowledged that the Bank governor, Mark Carney, would be forced to write a second open letter to the chancellor, explaining why inflation has dropped more than one percentage point below the 2% target.
The weakness of wage growth is at the heart of a serious divergence in views among MPC members that has been aired publicly in recent months, with the Bank’s chief economist, Andy Haldane, arguing in a speech that interest rates might even have to be cut to zero to prevent deflation.
Wednesday’s minutes of the policy meeting, held on 8 and 9 April, confirmed that there was a wide range of views about the future path of interest rates. The MPC said it would take stock of the state of the labour market and the amount of slack in the economy in the runup to the publication of its next quarterly inflation report on 13 May.
But Simon Wells, UK economist at HSBC, said even if the Bank’s analysis suggested inflation is poised to take off, the MPC was unlikely to make any major decisions over the next month with the possibility of coalition negotiations looming.
“Coming so soon after the election and with a significant chance that the new government would not yet be known, the MPC may not want to do anything that triggers market volatility in the May report,” he said.
