UK interest rates stay on hold but Bank of England hints at rise

The chances of a May increase in interest rates have increased sharply after two members of the Bank of England’s monetary policy committee voted for an immediate rise in borrowing costs.

Sterling rose on foreign exchanges on news that Ian McCafferty and Michael Saunders had backed a quarter-point rise in the bank rate to 0.75%.

While the other seven members of the MPC voted to leave rates unchanged, the tone of the minutes of this week’s meeting left the City convinced that an upward move was on the way.

Although the economy grew by a modest 0.4% in the final three months of 2017, the MPC said there was a chance activity in late 2017 would be revised higher and signalled concern about rising earnings growth.

“The unemployment rate remained low in the three months to January. The firming of shorter-term measures of wage growth in recent quarters and a range of survey indicators suggest pay growth will rise further in response to the tightening labour market,” the MPC said.

The minutes added that the view of the MPC had not changed since last month, when the Bank used its quarterly inflation report to say that the prospect of excess demand meant interest rates would need to rise in order to keep the annual inflation rate sustainably close to its 2% target.

The seven MPC members voting for no change said May – when the Bank publishes its next quarterly economic health check – said that would be the right time to assess the extent of domestic inflationary pressure. A majority of the committee said little had changed since its February meeting and adopted a wait-and-see approach.

McCafferty and Saunders said there was “widespread evidence” that spare capacity in the economy was largely used up and that pay growth was on the increase, presenting upside risks to inflation.

According to the minutes, the duo said “a modest tightening of monetary policy at this meeting could mitigate the risks from a more sustained period of above-target inflation that might ultimately necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment.”