MPC vote split on Base Rate for first time in three years
Split signals a rate rise is getting closer.
An increase in the Bank Base Rate appears to be getting closer, following the publication of the latest Monetary Policy Committee (MPC) meeting.
Each month the MPC meets to set the UK’s Base Rate, which has sat at its current record low of 0.5% since March 2009. It's been years since any member of the committee voted to change it.
However, it’s been revealed that two of the nine members of the MPC actually voted to raise interest rates by 25 basis points in the August meeting minutes.
This is the first time in more than three years that any member of the committee has voted to increase rates.
The last time this happened was in July 2011 just before the Eurozone crisis.
What does this mean?
The Governor of the Bank of England, Mark Carney, along with six other MPC members voted for Base Rate to remain at 0.5%.
The two dissenters were Ian McCafferty and Martin Wheale, who proposed raising the Base Rate to 0.75%.
The minutes revealed that these two in particular felt "economic circumstances were sufficient to justify an immediate rise in Bank Rate". Specifically, they pointed to things like the rapid fall in unemployment, and the robust growth of Gross Domestic Product. McCafferty and Wheale also made the argument that while there are risks around the reaction of the financial markets to the the first rate rise after such a long period of sitting at 0.5%, those risks may actually be worsened by delaying a rise further.
Wheale has already been quite vocal about wanting to put the Base Rate up. He first voted for a rise in January 2011 but stopped in August 2011. Three years later he’s beating the same drum again.
Clearly a 7-2 split wasn’t enough to sway the vote. But it's a significant sign that rate rises could be coming sooner than expected.
Why does the Base Rate matter?
The Bank of England cut the Base Rate over five years ago to kickstart the economy.
A low interest rate environment helps growth as it makes borrowing cheaper and encourages people to spend rather than save.
Borrowers have been benefitting from rock bottom rates on things like mortgages and loans, but savers have been suffering from dreadful rates on their savings.
When will the Base Rate rise?
The financial markets predict a rise in the first quarter of 2015, while a significant minority of economists expect it by the end of 2014.
However, everyone agrees it’s likely to be small, probably by 0.25%, so as not to derail the recovery.
lovemoney.com reports on the Base Rate decision each month but you can also keep up to date on other important developments in What next for inflation and interest rates?
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