MPC votes to keep rates unchanged by 7-2 in March

The Bank of England left the way open for interest rates to rise in May after policymakers voted 7-2 in favour of leaving borrowing costs unchanged.

Economists had expected rates to remain unchanged at 0.5% at the monetary policy committee’s March meeting on Thursday but most were unprepared for two members to vote for an immediate quarter-point increase.

Ian McCafferty and Michael Saunders, both external members of the committee, argued an increase was required to deal with rising wages and to ward off a potential sharp change in policy if inflation stays high, the meeting minutes showed. In February all nine members of the MPC voted to keep rates on hold.

The minutes reiterated the MPC’s previous guidance that a gradual tightening of monetary policy would be needed to bring inflation down from 2.7% to the BoE’s 2% target. They noted that pay growth had picked up, unemployment had fallen and the economy was behaving broadly in line with the MPC’s expectations.

In response, the MPC appeared ready to increase rates when the BoE’s next quarterly inflation appears in May. Most economists expected a rate rise in May before the March minutes were published.

Explaining most members’ view that an immediate increase was not needed the minutes said: “There had been few surprises in recent economic data and the February inflation report projections, conditioned on a gently rising path of Bank rate, had appeared broadly on track. The May forecast round would enable the committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures.”

There was no explicit tough language from the MPC following February’s guidance that rates might rise faster than the market expected. The minutes suggested policymakers were content with market expectations, which pencil in a quarter point rise to 0.75% in May.

But Paul Hollingsworth, UK economist at Capital Economics, said the minutes indicated the MPC was on track for a rate rise in May.

Hollingsworth said: “While the MPC stopped short of explicitly committing to another hike in May, the surprisingly hawkish tone of March’s minutes suggests it seems very likely. Indeed, two MPC members voted to raise interest rates now, on the back of this week’s labour market figures, which revealed wage growth picking up further.”

The MPC left the Asset Purchase Facility's stock of government bonds at £435bn and corporate bonds at £10bn, as expected.

In an initial reaction, the yield on the benchmark 10-year Gilt was down by three basis points at 1.50% and that on the two-year note up by one.

The pound ticked higher against the US dollar to $1.4181, up by 0.28% immediately after the decision was announced at midday GMT but sterling was down 0.12% to $1.4124 at 13:08 GMT. STerling rose 0.05% against the euro to €1.1467.

In its policy statement, the committee appeared to be looking through recent slightly softer than expected prints on GDP, pointing out that the fourth quarter's preliminary read was prone to revisions, while wages and unit labour cost growth appeared to be headed in the right direction.

"The steady absorption of slack has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target," the statement read.