MPC votes 5 to 3 to keep Bank Rate at 0.25%

The continued drop in the rate of unemployment prompted two more rate-setters on the Monetary Policy Committee to vote for an immediate 25 basis point increase in Bank Rate.

"Continued growth in unemployment could suggest that spare capacity is being eroded, lessening the trade-poff that the MPC is required to balance and, all else equal, reducing the MPC's tolerance of above-target inflation.

"Loking ahead, key considerations in judging the appropriate stance of monetary policy are the evolutoion of inflationary pressures, the persistence of weaker consumption and the degree to which it is offset by other components of demand," the Bank of England said in its Monetary Policy Summary.

At the time of the May Inflation Report, the BoE had anticipated the economy would maintain a small degree of spare capacity throughout most of its three-year forecast period.

That was now considered to be less so.

Market consensus had been that only Forbes would vote for a hike, unchanged from May.

As of 1203 BST, cable was edging higher by 0.17% to 1.2772.

"Despite the change in vote split, we remain of the view that no interest hike will be delivered in the course of the next two years," Barclays Research's Fabrice Montagne told clients.

On the other hand, Paul Hollingsworth, UK economist at Capital Economics said: "With the economy having weathered political uncertainty relatively well in the recent past, and signs emerging that the Government may be about to ease back on austerity, today’s decision and minutes support our view that the first hike in interest rates will come much sooner than the April 2020 date implied by markets ahead of today’s meeting."

The decision

The Monetary Policy Committee voted 3 to 5 to keep Bank Rate at 0.25%, with Kristin Forbes, Ian McCafferty and Michael Saunders preferring an increase of 25 basis points.

Rate-setters voted unanimously to maintain the stock of the BoE's corporate bond purchase programme at 10bn pounds. Committee members also decided unanimously to keep the size of the Asset Purchase Facility at 435.0bn pounds.

The context

GDP growth had declined "markedly" the MPC said, reflecting weaker household spending.

However, according to the Old Lady on Threadneedle Street it remained to be seen how large and persistent that slowdown in consumption would prove.

CPI inflation on the other hand picked up to a 2.9% year-on-year pace in May, above the MPC's expectation and might rise above 3% by the autumn, the MPC said.

Inflation was also likely to remain above target for an extended period as sterling's depreciation continued to feed through into the prices of consumer goods and services.

Price pressures at the 'core' level had also intensified, with Bank staff's summary core inflation indicator increasing to 2.4%.

The MPC also took note of how advanced economy interest rates had also fallen, particularly at longer maturities, minutes of the meeting showed.

Bank also noted that the recovery in global equity prices in 2017 perhaps indicated that investors had taken an even more positive view of global growth prospects.

An additional 2.5% drop in the pound's exchange rate since the Inflation Report - if sustained - would add to that imported inflationary impulse, the BoE added.

A substantial part of that fall had ocurred immediately following the UK general election, it noted.

As anticipated in the May Inflation Report, external trade and investment had picked-up.

Export indicators had strengthened, likely due to the weak pound but also the increasingly strong global economy.

In parallel, most surveys of investment intentions had remained above their historic averages.

"Surveys of general business activity suggest a modest recovery in GDP growth in the second quarter," the Monetary Policy Summary read.

-- More to follow --