An interest rate increase this year will be more likely than the timing investors expect, according to policy makers at the Bank of England (BOE), as the debate regarding the schedule of the first policy tightening in seven years intensified today.
Bank of England’s monetary policy committee indicated “relatively low probability”
The minutes from the latest meeting of the Bank of England’s nine-member monetary policy committee indicated that some financial market prices suggest a “relatively low probability” of a bank rate increase this year. However, the committee said this was “somewhat surprising,” given the fact that the economy is strengthening.
Last week, Bank of England Governor Mark Carney stated that the tightening will probably begin earlier than expected, which prompted investors to bet on the timing of the interest rate increase. Such speculations will be ignited by the meeting minutes from the Bank of England’s monetary policy committee and comments from rate setter Martin Weale.
Nick Beecroft, a senior market analyst at Saxo Capital Markets in London, told Bloomberg, “Carney had already said it all. This was therefore an unsurprising set of minutes which did however paint a picture of a committee which is becoming increasingly divided about the appropriate time for tightening.”
In a speech today, Weale expressed his belief that the Bank of England’s assessment of underemployment could overstate the sluggishness in the jobs market, which experienced an astounding recovery in recent months.
“If this is the case, then, as the economy continues to grow, unemployment could fall faster than the MPC expects. That alone points to a need for a policy profile tighter than in our May forecast,” according to him.
He added that the committee’s primary forecast regarding the capacity in the economy of 1% to 1.5% of output may be lower. According to him, it could be as low as 0.33%.
Weale emphasized that even if the Bank of England starts to gradually increase interest rates, “monetary policy will still be providing a great deal of support for the economy.” He added, “The policy of raising bank rate gradually does imply that the first rise needs to come sooner than would otherwise be the case.”
Unanimous vote to keep benchmark rate
The monetary policy committee unanimously voted to keep the benchmark rate at 0.5% this month. The minutes also showed that an increase is not imminent, as all policy makers agreed to see more evidence of slack being absorbed “before an increase in bank rate would be warranted.”