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Oh yes they will...oh no they won't: what does MPC split mean for rates?

Oh yes they will...oh no they won't: what does MPC split mean for rates?

The confusion surrounding interest rates deepened as the Monetary Policy Committee minutes showed a split in its nine-strong team. 

The minutes from last month's MPC meeting revealed that two MPC members – Martin Weale and Ian McCafferty – voted for a rate hike. It was the first time in three years there was a divide within the body.  

‘The plot twists in the interest rate saga are coming thick and fast,’ Hargreaves Lansdown senior analyst Laith Khalaf said.

‘This is the first time in more than three years that any member of the committee has voted to increase rates and is a significant sign of dissention in the ranks.’  

Weale and McCafferty argued the continuing fall in unemployment alongside survey evidence of tightening in the labour market meant wage growth was likely to pick up.

They pushed for the Bank to 'anticipate labour market pressures by raising the Bank rate in advance of them.'   

Interest rates have been at a historic low  of 0.5%  for more than five years.  

Bank of England governor Mark Carney has been measured when talking about rates, saying they were unlikely to rise before next year due to weakness in real wages.  

In an interview with the Sunday Times marking the one-year anniversary of forward guidance, Carney offered an equally guarded message.  

“In terms of our broader message, and where the Committee is united and has the same view, is that as the expansion continues, rates are going to go up,” Carney said.  

‘People might have different views on the exact timing, but it will happen and people should plan accordingly. Second, our best judgment of the path is that it will be limited and gradual, a new normal if you will.’

Last week’s inflation report indicated MPC members hold a wide range of views ‘on either side of that central estimates.

Meanwhile, yesterday’s inflation data eased the pressure on Carney, with prices declining by more than expected in July to 1.5%.   

Barclays saw the minutes as backing its view rates will rise before the year is out.

‘We expect the support for a rate increase to grow in the coming months and we foresee the first hike taking place before year end,' the bank said.  

‘We believe these (Weale and McCafferty’s) arguments are likely to be endorsed by more members over the coming months, especially since we forecast the economy continuing to grow strongly and the unemployment rate to drop further.'

But the vote has not swayed EY Item Club senior economic adviser Martin Beck’s call that rates will remain on hold until next year.

‘Today’s split vote does not change our view that a rate hike will have to wait until 2015, Beck said.

‘A minority of members appears to be supportive of a rate hike, but the absence of inflationary pressure and the risks involved in tightening policy make it difficult to see majority support for a hike emerging in the near future.’  

Beck added: ‘Every relevant indicator remains subdued. CPI inflation fell further below target in July while the same month also saw producer input and output prices drop at the fastest annual rate in almost five years.’  

Khalaf also does not believe the split necessarily points to a rate hike this year.  

'It may yet be premature to start counting your chickens however,’ Khalaf said.

‘The last time the committee vote was split was in July 2011, shortly before the eurozone crisis kicked interest rate rises into the long grass. ‘

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