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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Hi Meldrew Reborn How can the British Economy be on the right road? We are six years down the road from the big crash in 2008, and UK interest rates are still at 0.5 percent, and the US interest rates are still at 0 percent. Both the GBP and and the US dollar have been massively inflated. It ain't working. You're darn tootin' that the interest rates are going to stay at 0.5 percent until the next election. The low interest rates are buoying up the stock market and the property market. People are happy when they are surrounded by all this phoney wealth so they will vote Conservative, because, like you, they have been duped into thinking that the country is on the mend, when in fact it is sinking deeper into the quicksand. The markets can have a huge sell-off. This can cause the price of UK government bonds (gilts) to collapse. As they collapse, their yield rises. This means that any new bonds issued by the UK government will have to yield the new market rate, otherwise no one will buy them. That is how the bond market forces the B of E to raise interest rates. Meldrew Reborn writes: I agree that the British Economy is far from being fixed, but at least its on something like the right road, and currently much better than Eurozone members. What exactly are the phoney figures from the Government? The BOE isn't the Government - I'm sure the Government would want to put off interest rate rises beyond the next election, but I doubt that will actually be the case. Perhaps you'd like to explain the mechanism by which the bond markets will force up the official rate, I can readily accept that market rates can diverge from the official rate (this is already apparent in mortgage rates which are largely disconnected from the BOE rate) but don't quite understand how the markets can change the official rate.
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Meldrew Reborn writes: Hi Arblaster I agree that the British Economy is far from being fixed, but at least its on something like the right road, and currently much better than Eurozone members. What exactly are the phoney figures from the Government? The BOE isn't the Government - I'm sure the Government would want to put off interest rate rises beyond the next election, but I doubt that will actually be the case. Perhaps you'd like to explain the mechanism by which the bond markets will force up the official rate, I can readily accept that market rates can diverge from the official rate (this is already apparent in mortgage rates which are largely disconnected from the BOE rate) but don't quite understand how the markets can change the official rate. Hi Meldrewreborn The Eurozone is collapsing mainly because they are in a different phase of their economic cycle. The last I heard the National Debt was 1.3 trillion and rising. If it were falling, THEN it might be on the right road. I know that the BOE is supposed to be independent...in the same way a murder victim is independent as his assailant squeezes his neck a little more, and the ONS is as objective as its paymasters allow it to be. You trust the government far too much. These are the same people who told you that Saddam Insane had weapons of mass destruction and ties to Al Qaeda. These are the same people who told you that the Syrian government had gassed thousands of innocent people. These are the same people who told you that the Russian separatists had shot down a Malaysian aircraft. These are the same people who have lost that dossier Geoffrey Dickens gave to the Home Secretary. If they told me London was the capital of the UK, I would go to the public library to look it up. Bonds are like a see saw: prices go up; yields go down: prices go down; yields go up. If the bond market collapes, the yields will shoot up. The BOE will be forced to raise interest rates, because no one will buy their bonds otherwise; and the government will not be able to borrow money. Quantitative Easing, is where the government print money to BUY THEIR OWN BONDS AND THAT IS HOW THEY KEEP THE INTEREST RATES AT 0.5 percent. NOW do you understand how it works?
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Hi Arblaster I agree that the British Economy is far from being fixed, but at least its on something like the right road, and currently much better than Eurozone members. What exactly are the phoney figures from the Government? The BOE isn't the Government - I'm sure the Government would want to put off interest rate rises beyond the next election, but I doubt that will actually be the case. Perhaps you'd like to explain the mechanism by which the bond markets will force up the official rate, I can readily accept that market rates can diverge from the official rate (this is already apparent in mortgage rates which are largely disconnected from the BOE rate) but don't quite understand how the markets can change the official rate.
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16 September 2014