Bank Of England Is Going To Raise Borrowing Costs In August

Andy Haldane supports two others in the MPC with the idea of interest rate rise

The major part of the monetary policy committee voted for interest rates to remain at 0.5% this month.

The Bank of England mentioned the chances of an August rate rise, when its chief economist, Andy Haldane, supported the opinion of two other members of its rate-setting MPC about a hike in interest rates.

Ever since joining the monetary policy committee, Andy Haldane broke ranks with the majority on the nine member rate-setting panel to join Ian McCafferty and Michael Saunders in the idea of increasing in interest rates, which will probably boost speculation that Threadneedle Street might be speeding up for a rise in two months. Besides, on the foreign currency exchanges, the pound, which had been weaker than the dollar at $1.31 before the announcement, increased its value to $1.3220.

The new decision about rates appears after the Bank delayed increasing the cost of borrowing the previous month at a time of the weakest readings of economical health in five years, which had been influenced by heavy snowfall. The cranes and diggers fell idle and forced shoppers to stay at home, causing growth to slow to 0.1% in the first quarter of the year. In May the Bank thought the slowdown was a deviation the economy would overcome and emphasized this perspective on Thursday.

“Many indicators of household spending and sentiment have bounced back strongly from what appeared to be a weakness,” the MPC said.

Nevertheless, the Bank’s governor, Mark Carney, was supporting the rates to remain at 0.5% this month, but if the economy were to develop in line with its projections, “a tightening of monetary policy over the forecast period would be appropriate”.

Haldane has disagreed publicly with the governor before. In 2001 was the previous time he voted against the majority on the MPC.

After easing monetary policy to stimulate the economy and promote job creation during the financial crisis, the tone from the MPC’s latest meeting leads the Bank on slowly tightening the money supply just as Britain prepares to Brexit. Businesses warn about the risk of this strategy, taking into account the uncertainty over the result of the talks with Brussels.

The senior UK economist at the consultancy Capital Economics, Ruth Gregory, mentioned the Bank could raise interest rates in August and repeatedly in November, taking the cost of borrowing to 1% before the end of the year. “We doubt that the MPC will avoid solving this issue for too much longer,” she said.

Tej Parikh, a senior economist at the Institute of Directors, said: “The MPC risks losing confidence with a premature rate hike, particularly while political noise continues to bring uncertainty for businesses.”

Since its last meeting, Threadneedle Street also said it had reevaluated the moment at which it could begin reducing its easing bond buying programme. Instead of interest rates needing to rise to about 2% as the Bank had previously argued, they would now only need to reach about 1.5% it said, although the final decision would depend on the strength of the economy.

Jeavon Lolay of Lloyds Bank said: “The surprising switch by Bank of England chief economist Haldane to support an immediate rate hike puts August firmly on the table. There will be even more interest in what governor Carney says tonight at the annual Mansion House speech.”

The decision about the interest rate comes before Carney gives his speech in London on Thursday night, as well as the chancellor, Philip Hammond, and it will also be watched closely for clues over the Bank’s future policy decisions.