The Bank of England kept base rate on hold again as a split emerged between rate setters over the impact of recent inflationary pressures.

Monetary Policy Committee members voted to keep base rate at its current level of 5.25 per cent by a margin of seven-to-two, with Swati Dhingra and Dave Ramsden overruled as they urged the bank to cut by 25 basis points to 5 per cent.

Minutes from the MPC’s most recent meeting show Dhingra and Ramsden, who have each been more dovish than their colleagues this year, are less concerned than peers about services inflation and wage growth data that pushed back market rate cut expectations earlier this week.

Wednesday’s Office for National Statistics data showed the headline rate of inflation had finally returned to the bank’s 2 per cent target, but higher-than-expected services inflation and persistent labour market strength overshadowed the achievement.

Mega-dove: Swati Dhingra has been consistently the most dovish member of the MPC since joining in 2022

Mega-dove: Swati Dhingra has been consistently the most dovish member of the MPC since joining in 2022

Mega-dove: Swati Dhingra has been consistently the most dovish member of the MPC since joining in 2022 

Who are the rebels?

External member and mega-dove Dhingra, who is also associate professor of economics at the London School of Economics, has voted for base rate to be lower than the consensus decision on 12 occasions since joining the MPC in September 2022.

Dhingra voted for a cut to 5 per cent at each of the last four meetings since 1 February.

Ramsden, who is the BoE’s deputy governor for markets and banking, has now voted for a cut two meetings in a row.

Since joining on 17 September 22, his MPC record stands at 16 votes for a hike, 27 votes to maintain and four votes to cut.

No other member of the MPC has voted for a cut since base rate peaked at its current rate.

How BoE rate setters have voted since joining the MPC?
Andrew Bailey  Sarah Breeden  Ben Broadbent  Swati Dhingra  Megan Greene  Jonathan Haskel  Catherine L Mann  Huw Pill   Dave Ramsden
Voted to increase 14  16  4 18  18  14  16 
Voted to hold  21  109  26  37 
Voted to cut 
No. of MPC meetings   36  128  15  49  23  23  57 
Dave Ramsden has now voted for a cut two meetings in a row

Dave Ramsden has now voted for a cut two meetings in a row

Dave Ramsden has now voted for a cut two meetings in a row 

What’s the split?

The BoE said the MPC have expressed a ‘range of views’ about what evidence is needed to warrant a rate cut ‘and the degree to which incremental information was leading them to update materially their assessment of inflation persistence’.

Members who voted to maintain the rate think CPI returning to its 2 per cent target is ‘not necessarily indicative of the required sustained return to target’.

The BoE said: ‘Continued high levels of, and upside news to, services inflation supported the view that second-round effects would maintain persistent upward pressure on underlying inflation.

‘Wage growth had continued to exceed model-based estimates. Indicators of domestic demand were stronger than had been expected, and the risks to the outlook for activity were skewed to the upside.

‘For these members, more evidence of diminishing inflation persistence was needed before reducing the degree of monetary policy restrictiveness.’

Goods price inflation has eased significantly but services inflation remains elevated

Goods price inflation has eased significantly but services inflation remains elevated

Goods price inflation has eased significantly but services inflation remains elevated 

But Dhingra and Ramsden believe the upside news in services price inflation does ‘not alter significantly the disinflationary trajectory that the economy [is] on’, while the increase in the national living wage in April on pay growth should be seen as anomalous.

‘Such factors [should] not push up medium-term inflation,’ it said.

‘For these members, bank rate needed to become less restrictive now to enable a smooth and gradual transition in the policy stance, and to account for lags in transmission.

‘Given the subdued outlook for demand, the risks to inflation remaining sustainably at the target in the medium term were to the downside.’

When will the BoE cut base rate?

Short-dated gilt yields and sterling fell in the wake of the decision, suggesting markets are less confident the BoE will keep base rate on hold again at its August MPC meeting.

Current pricing suggests the probability of an August rate cut has inched up from 40 to 60 per cent today, according to ING analysts.

Traders are more confident the bank will cut at its 19 September and 7 November meetings.

The headline rate of inflation has fallen back to target

The headline rate of inflation has fallen back to target

The headline rate of inflation has fallen back to target 

The BoE said it is ‘prepared to adjust monetary policy as warranted by economic data to return inflation to the 2 per cent target sustainably’, and would therefore ‘continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole’.

‘As part of the August forecast round, members of the Committee would consider all of the information available and how this affected the assessment that the risks from inflation persistence were receding,’ it added.

Julian Howard, chief multi-asset investment strategist at investment group GAM, said: ‘The path appears increasingly clear for some easing at the August meeting’.

‘Inflation has come right down to the target level of 2 per cent, unlike in the US and – to an extent – Europe. 

In particular, the UK’s energy bills are easing and although its unique bill capping regime has seen lumpier price movements, actual realised prices for consumers are finally normalising.

‘Some risks remain, however. The UK is in the middle of an election campaign and a potential Labour landslide could unsettle markets, in particular the currency. 

Sir Keir Starmer has come under pressure in recent days on the issue of tax and spending.

‘While the headline rate of inflation may have encouragingly sunk to 2 per cent, the Bank will be keen to avoid a policy error in which it cuts rates but then has to hold fire or, worse, outright reverse the easing due to forces beyond its control.’

When will interest rates fall?

When will interest rates fall?

When will interest rates fall? 

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