LONDON — There is a growing divide within the Bank of England about if and when the central bank should raise interest rates back to the level they stood for seven years before last summer’s emergency post-Brexit rate cut.
Several members of the bank’s rate-setting Monetary Policy Committee have spoken publicly in recent days, and it is very clear there is a big split in the thinking of the committee’s members.
That became even more clear on Wednesday when Jon Cunliffe, who sits on the MPC as deputy governor for financial stability, made clear that he does not support a rate hike anytime soon, citing concerns about slowing consumer spending, which he believes currently trumps the surging inflation caused by the pound’s slump since the referendum — which has itself been a driver of slowing spending.
Consumer spending “is slowing as households’ real incomes are squeezed by higher inflation, we expect some of that slowing to be offset by growth in business investment, growth in exports. And I want to see how that plays out,” Cunliffe told the BBC radio programme Wake Up To Money during a visit to the North East of England on Wednesday.
“We do have to look at what’s happening to domestic inflation pressure, and I think that, on the data we have at the moment, gives us a bit of time to see how this evolves.”
Cunliffe’s remarks put him firmly on the side of Governor Mark Carney, who in his Mansion House speech last week said that “now is not yet the time” to raise rates. This is not a huge shock as Cunliffe is often regarded as one of the governor’s key lieutenants and is unlikely to directly contradict Carney in public.
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%.
The likes of Cunliffe and Carney, as well as Gertjan Vlieghe, who is probably the most dovish — inclined to cut rates and loosen policy — member of the MPC believe that the inflation surge since the vote is not likely to be sustained for any great period and instead are focusing on the weaknesses in spending.
On the other side of the coin are Ian McCafferty and Michael Saunders — the two remaining members who voted to hike rates in this month’s 5-3 vote to hold (the third, Kristin Forbes, has now left the bank) — and Chief Economist Andy Haldane. Haldane, just after Carney’s speech, made clear that he is very close to backing a rate hike in the near future.
The developing split in the MPC has become so large that some banking analysts are forecasting that a rate hike could come as early as August, the next time the committee meets.
Japanese banking giant Nomura, for instance, said last week that it had decided to change its view on rates and now expects “the MPC to raise interest rates by 25bp on 3 August. With the Bank growing increasingly intolerant of above-target inflation, it has begun to feel that weaker data would now be needed to prove the case for keeping policy on hold, rather than stronger data being required to justify higher rates.”