LONDON — Brexit has speared the Bank of England’s Monetary Policy Committee on the horns of a dilemma.
On Wednesday, Britain’s most senior economist and one of the Bank of England’s chief policymakers, Andy Haldane, indicated he could back hiking interest rates at the next meeting, something the bank has not done since before the financial crisis.
Haldane’s justification for saying he would back a rate hike in the near future is that the global economy is booming and that Britain’s economy has held up better than expected since the vote.
“Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year,” he said in a speech on a visit to Yorkshire on Wednesday.
“The first 25 basis-point rise in UK interest rates for 10 years seems like a momentous step. But it would still leave monetary policy highly accommodative by any historical metric.”
Haldane’s comments sent ripples through the City of London and the financial media, coming just days after he backed leaving rates on hold when the bank’s eight member Monetary Policy Committee (it is usually made up of nine people, but has stood at eight since the resignation of Charlotte Hogg in March) voted 5-3 in favour of holding rates, with three MPC members backing a hike in the bank’s base rate.
Less than two years ago, and before the UK voted for Brexit, Haldane indicated that he could back an interest rate cut when consensus in the Bank of England was that its next move would be a hike. Of course, then Brexit came along and changed everything.
The BoE swiftly announced a rate cut from 0.5% to 0.25% and a pumped up quantitative easing programme to deal with the initial shock of the Brexit vote and market expectations were largely that it would leave rates unchanged at least until Brexit talks were complete.
At its simplest level, the policy dilemma facing Britain’s central bank is that it must balance surging inflation brought on by the weakened pound since the referendum, with the slowdown in the economy, dwindling consumer spending and declining inward investment.
Inflation currently sits at 2.9%, well above the 2% target mandated by the government, while GDP growth in the first quarter of 2017 was just 0.2%.
Haldane’s speech on Wednesday, alongside the 5-3 vote in June, are clear signs that the UK could be moving towards the “momentous step” mentioning by the bank’s chief economist.
Within June’s vote a very clear split emerged. Of the MPC’s four “external members” — who work for the Bank of England on a part-time basis and are appointed by the Chancellor of the Exchequer — three voted for a hike.
The outgoing Kristin Forbes, whose terms ends in just over a week, Ian McCafferty, and Michael Saunders. Gertjan Vlieghe, who is probably the MPC’s most dovish — inclined to cut rates and loosen policy — member, backed a hold.
Every internal member of the MPC — those who hold official titles at the bank beyond their MPC commitments — voted to leave policy unchanged, and by Governor Mark Carney’s comments on Tuesday, when he said “now is not yet the time” to increase rates, it seemed unlikely that any of those votes would change anytime soon.
Here is a breakdown of the dynamics of the committee’s votes:
- Mark Carney — Hold, confirmed in speech on Tuesday.
- Jon Cunliffe — Voted to hold in June, likely to do the same in August.
- Ben Broadbent — Voted to hold in June, likely to do the same in August.
- Andy Haldane — Voted to hold in June, but has indicated he could back a hike in August in speech on Wednesday.
- Ian McCafferty — Hike, likely to do the same in August.
- Michael Saunders — Hike, likely to do the same in August.
- Gertjan Vlieghe — The MPC’s most dovish member, unlikely to vote anything other than a hold.
- Kristin Forbes (outgoing) — Voted to hike in June, will not vote again.
- Silvana Tenreyro (incoming) — Unknown as yet to vote, likely to back a hold.
- Unknown incoming member — Charlotte Hogg’s replacement is likely to be a BoE insider.
While the composition of the June vote was 5-3, many were quick to note that with Forbes on her way out the vote split made it look like a hike was more likely than it actually was, especially with the bank imminently appointing a new internal member of the committee — who, if current dynamics were followed, would be likely to back holding rates for a significant period.
However, Haldane’s comments throw a spanner in the works. If the bank’s chief economist is thinking about voting for a hike, then it is not beyond the realms of possibility that the likes of Ben Broadbent and Jon Cunliffe — the bank’s deputy governors for monetary policy and financial stability respectively — might be thinking along the same lines, putting a hike closer on the horizon.
“I think it’s really important to see what Broadbent thinks. That will really shape expectations,” Sam Hill, an economist at RBC Capital said, according to a report from Reuters. Broadbent could speak next week, although that won’t be known until the BoE publishes its weekly calendar on Friday.
It is now close to two months until the MPC meets again, with the bank taking a long hiatus for a summer break. In that time, data could swing either way. For instance, inflation could show that it has peaked, making a hike less likely, or GDP growth could prove stronger than expected, making a hike more likely.
To be clear, a rate hike would require several switches in allegiance from MPC members, but it is now looking more likely than it has been for many, many years.