BoE hawks back down

The Bank of England’s Monetary Policy Committee voted unanimously against raising rates, with two hawks switching sides. Dr Matthew Partridge asks – we are ever going to see a rate hike?


Mark Carney, BoE governor, has admitted that UK deflation is possible

Members of the Bank of England's Monetary Policy Committee voted unanimously against raising rates, with two hawks switching sides. Are we ever going to see a rate hike?

What's happening?

According to the minutes of this month's meeting, all the members of the BoE's Monetary Policy Committee voted against raising interest rates from their current levels of 0.5%. Of course, the decision to keep rates on hold was widely expected. However, what has surprised many people is that Martin Weale and Ian MacCafferty, who have voted to raise rates at every meeting since August, seem to have changed their minds and voted with rest of the MPC. Experts believe that this represents a blow to the hopes of those who want an early rate rise

Why did they change their minds?

The minutes suggest that Weale and MacCafferty switched their votes extremely reluctantly with the decision "finely balanced". The decisive factor was "the sharp fall in inflation" to 0.5% (which the MPC was told about prior to the meeting). On the one hand they believed that this drop was "probably driven largely by temporary factors and was unlikely materially to affect the behaviour of households and businesses". However, they decided that it was just too dangerous to hike rates. This was because the risk of long-lasting deflation would be "increased by an increase in Bank Rate at the current juncture".

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Is there really a risk of deflation?

According to the ONS, prices in December were only 0.5% higher than they were at the same time last year, with no monthly change from November to December. This would suggest that we're already very close to outright deflation. However, ONS admitted in the accompanying analysis that "the main contribution to the slowdown in the inflation rate came from prices for gas and electricity". Indeed, core inflation (which excludes food and energy) actually went up from 1.2% to 1.3%. Some economists argue that since the UK is a net importer of both food and energy (despite North Sea Oil), the economy benefits from what has been called "joyflation".

What does Mark Carney think?

As usual, the BoE governor seems to making an effort to avoid coming down on one side. In an interview last week he admitted that deflation was possible, even likely. However, he didn't think that it would be sustained. He also suggested that lower oil prices would be good for the overall British economy (though Scotland would be negatively affected). Overall, he remained non-committal about interest rates, re-iterating that rises would be "gradual and limited".

So, when will see interest rates going up?

Even before the latest inflation figures there was a consensus that a rate rise wouldn't happen soon. The FT's annual survey of economists, released at the start of this year, suggestion that most think that rates wouldn't rise until the end of this year. However, some pundits think that the inflation figures and the latest minutes mean that savers may have to wait longer. For instance, Ben Brettell of Hargreaves Lansdown thinks that a rate rise in 2015 is "extremely unlikely", while Investec Securities puts it at August 2016. Former MPC member Professor David Blanchflower of Dartmouth College goes even further by predicting that the first rate hike won't happen until 2020.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri