Bank of England split over interest rates

On September 3-4, the Bank of England decided to hold interest rates, with two members of the Monetary Policy Committee voting to raise the benchmark rate. This is the second consecutive month with divisions within the Committee.

According to the minutes of the MPC (Monetary Policy Committee) meeting, which were released today, Ian McCafferty and Martin Weale voted to raise the benchmark rate from its current 0.5% to 0.75%.

The other seven members, however, felt it would be better to wait longer and not rush into the central bank’s first hike since 2007.

Those voting in favor of holding rates were Mark Carney (The Governor), David Miles, Nemat Shafik, Ben Broadbent, Jon Cunliffe, Kristin Forbes, and Andrew Haldane.

Regarding the proposal to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion, all MPC members voted in favor.

The MPC is concerned about the weak Eurozone economy, a slowing down in the UK housing market, exports and manufacturing.

Eurozone recession risk

It believes there is a good chance that the Eurozone’s current “temporary weakness” might become a permanent state, i.e. there is a risk the currency bloc could slide into another prolonged recession. If this occurred, some governments would be facing solvency problems again.

In its publications of the Minutes, the Bank of England wrote:

“The accumulating evidence of the weakness of the euro area had been the most significant development during the month. GDP growth had disappointed and inflation had fallen further. Even if some of the weakness, particularly in Germany, turned out to be temporary, it was possible that the underlying pace of the recovery in the euro area was slower than the Committee had estimated.”

“Although the direct impact on the UK of the current phase of disappointing activity might be relatively modest, a prolonged period of poor growth and very low inflation could have a larger impact if it led once again to uncertainty about the sustainability of euro area public and external debt. This could damage confidence and disrupt financial markets, and, as a result, the downside risks to UK growth in the medium term had probably increased.”

Surprisingly little mention was made by the MPC about the Scottish independence referendum, which is due to take place tomorrow, other than noting that some foreign exchange markets had experienced volatility.

The Bank of England revised up its GDP growth estimate for Q3 2014 to 0.9%. It added that the pace will likely slow down in Q4 2014.

The MPC does not believe the renewed tensions between Ukraine and Russia, plus the turmoil in the Middle East will have a significant impact on the UK’s economic outlook. “That said, further escalation had the potential to lead to disruption to energy markets and reductions in investor risk appetite and business confidence. Against that backdrop, the continued low level of volatility in a number of financial markets, particularly for crude oil, remained remarkable,” the BoE wrote.