Two members of the Bank of England monetary policy committee broke ranks and voted for an interest rate hike, minutes from this month’s meeting show.
Ian McCafferty and Martin Weale wanted to raise the Base Rate by 25 basis points to 0.75 per cent at the meeting on 6 and 7 August.
Weale has publicly advocated a rate rise since February 2011, but has not voted for the measure on the committee since July 2011. At that juncture, he was joined in calling for a 25bps rise by Spencer Dale, who has since left the MPC.
Weale and McCafferty argued the continued and rapid decrease in unemployment could start affecting inflation through wage growth soon, and the interest rate needs to be raised in advance to be effective.
If wage growth did spike suddenly, consumer business margins are healthy enough for them to absorb much of the increase before starting to pass it on, they say.
“Moreover, if recent robust GDP growth rates had been underpinned by stimulatory monetary policy, in addition to a release of pent-up demand driven by reduced uncertainty and improved credit conditions, then the erosion of spare capacity would be likely to remain rapid while policy remained expansionary.”
A financial market reaction to the first increase could create risks to the recovery, but the chance of it happening and its consequences are unlikely to lessen over time, McCafferty and Weale say.
It is possible the risks may be “augmented” by delaying the rate increase, they say.
The seven members in favour of holding the rate steady believed inflation was too subdued to warrant an increase. Stubbornly stagnant wage growth could be evidence that slack in the labour force was greater than first thought, some argued.
An increase in the rate may also push sterling higher, dampening inflation further and impede the rebalancing of the UK economy.
Capital Economics UK economist Samuel Tombs says it would be “foolish” to dismiss the chance of a rate rise this year.
Although, for now, economic data is easing pressure on the status quo, he adds.
“Not least the fall in inflation to 1.6 per cent in July and the slower growth in employment.”
Inflation looks like it will undershoot the MPC’s expectations this year and stay low through 2015 as well, Tombs says.
“For now, then, we still expect the first hike to come in February 2015. But, even if the committee decides to get on the front foot and raise interest rates before the end of the year, low inflation should ensure that the pace at which they rise is extremely gradual by historical standards.”