In last month’s meeting, the Bank of England’s rate-setters voted to maintain rates at 0.25% by a majority of five to three.
The ratio surprised many industry commentators who anticipated more of a unified consensus around ‘no change’ from the central bank.
Most analysts were expecting at least one vote in favour of raising rates from panel member Kristin Forbes, who was the only dissenter against holding rates in April, leading to speculation that inflation could hit 3% before the BoE felt compelled to act.
“It’s almost as if the hawks in the MPC have staged a coup,” said David Lamb, head of dealing at FEXCO Corporate Payments.
“No-one had expected such a tectonic shift in the committee’s view on interest rates, and the surprise hit the markets like an electric shock.”
Minutes after the panel’s voting was revealed, sterling had return to its pre-general election height, moving from $1.27002 to $1.27858 against the dollar.
Conversely, the FTSE 100 took a plunge on Thursday, after a double beating from weaker retail sales figures and the upward move in the pound. At the time of writing, the index was down 0.89% at 7,408.
Set against a backdrop of disappointing retail sales, slackening growth, shrinking real wages and the added political uncertainty, the rate panel’s split was surprising, said Hargreaves Lansdown senior economist Ben Brettell.
“The minutes show policymakers are more optimistic than many economists about the UK’s prospects,” he added.
“It seems the willingness of the MPC to ‘look through’ higher inflation and leave rates on hold is wearing thin, and if inflation continues to surprise we could see higher rates by the end of the summer.”
Michael Metcalfe, global head of macro strategy at State Street Global Markets was especially surprised that the hawkish tendencies of the BoE “have not been derailed by the return of political uncertainty following the election.”
“It will take months to disentangle how the election will impact Brexit negotiations, as well as business and consumer confidence.
“Nonetheless, with Michael Saunders and Ian McCafferty getting behind calls for a base rate hike, it seems clear today is the BoE’s immediate concern on inflation is trumping what potential political fallout there may be on the economic outlook.”
