Sat, Mar 24, 2018 - Page 10 News List

Bank of England hints at May rate hike as wages rise


The Bank of England (BOE) has kept the door open to another interest rate hike in May to keep a lid on inflation pressures stemming from rising wages rather than from a Brexit-related fall in the pound.

While maintaining its benchmark rate at 0.5 percent on Thursday, the bank said rate increases are likely this year.

The minutes to the meeting showed that two of the nine members on the Monetary Policy Committee backed an immediate quarter-point increase to 0.75 percent.

Ian McCafferty and Michael Saunders argued that a “modest tightening ... could mitigate the risks from a more sustained period of above-target inflation that might necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment.”

Despite resisting an immediate hike, a majority in the committee is ready to back another interest rate increase soon, the minutes showed.

In November last year, the bank raised rates for the first time in a decade to clamp down on high inflation, even though higher borrowing costs have the potential to weigh on the economy, which had already slowed in the face of uncertainty related to the exit from the EU.

As in last month, the minutes showed that the “best collective judgment” of the rate-setting panel was that “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.”

Rate-setters also said future increases were likely to be “gradual” and “limited.”

It was in last month that investors started to price in a May hike. When the bank published quarterly economic projections showing inflation above the 2 percent target for a year or two, BOE Governor Mark Carney indicated that a hike in May was likely.

Economic figures since then were “broadly consistent” with those views, Thursday’s minutes said.

Figures this week have been mixed. Though annual inflation in February fell to an annual rate of 2.7 percent, wage growth is picking up, and that should support spending and inflation.

There was little new insight in the minutes regarding the bank’s views on the impact of Brexit, bar a reference to the fact that the British government secured the outlines of a transition deal after Brexit day on March 29, 2019.

Carney has been one of the more vocal advocates calling for a quick deal on a transition agreement so that businesses can plan ahead.

The transition deal, which is expected to be confirmed on Thursday at a meeting of EU leaders, has, according to many economists, made it even more likely that rates will be raised in May, alongside the next set of quarterly economic projections from the bank.

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