The Bank of England (BOE) will release its August interest rate decision on Thursday amid growing dissent within its own ranks. Although economists expect the Bank’s Monetary Policy Committee (MPC) to bypass a rate hike, the real story is likely to be how many members vote for one anyway.
The BOE appears to be at odds about what to do with monetary policy. This internal division was evident back in June when three Committee members voted to raise the benchmark interest rate. They were defeated by the five votes cast in favour of keeping policy on hold.
MPC members Michael Saunders and Ian McCafferty joined Kristin Forbes – the previous meeting’s sole dissenter – in voting for a quarter-point rate hike in June.
About a week after the vote, the Bank’s chief economist Andy Haldane said he will likely back interest rates increases later this year.
Brexit Risks Abating?
The BOE wasted little time slashing interest rates and expanding its bond-buying program after the June 2016 Brexit vote. Faced with political uncertainty and a grim economic outlook, Committee members lowered the overnight rate to a record low of 0.25%. It was the first rate cut since the financial crisis.
At the same time, policymakers warned that the U.K. will likely overshoot its inflation target – something they could tolerate in the short run.
But in the year since the referendum, the U.K. economy has performed fairly well. GDP is still growing – despite a recent cool down – and employment is rising steadily. What’s more, Prime Minister Theresa May appears to be softening her stance on a ‘hard Brexit’ following the disastrous election campaign.
Markets Await Decision
Investors are firmly looking to Thursday’s rate decision for big movements in the currency markets. A repeat performance of the June vote could trigger fresh gains for the British pound, which recently hit 11-month highs. Analysts say the pound is due for a large jump if more than two members vote to raise interest rates.
Sterling last traded above 1.32 U.S.