Interest rates may rise sooner than you think after surprise vote

Interest rates may rise sooner than you think after surprise vote

Mark Carney holds the casting vote on the monetary policy committee in the event of rate deadlock

Up until noon on Thursday markets had been presuming it would be a long time until UK interest rates increased.

To be precise, investors were not pricing in a full increase in borrowing costs from 0.25% to 0.5% until October 2020 - more than three years in the future.

That may all be about to change. For in the minutes accompanying Thursday's interest rate decision (which was, unsurprisingly, a no-change) there was a real surprise. Three of the MPC members voted for higher interest rates.

:: Pound surges on shock interest rate vote

While Kristin Forbes had been arguing for higher rates since March, and Ian McCafferty, another of the dissenters, had been arguing likewise in the months before the referendum, the 5-3 vote (Michael Saunders, another external MPC member, was the other prospective hiker) represents the most divided decision for at least six years.


Inflation a 'short-term challenge'

It also raises questions about whether the market is right to presume it will take so long for the Bank to lift borrowing costs.

After all, on the other side of the Atlantic, the Federal Reserve is now well into the process of lifting borrowing costs, and even talking out loud about reversing its quantitative easing programme.

Moreover, there is plentiful evidence to suggest that rock bottom interest rates are encouraging Britons to borrow more and more, leaving the economy vulnerable to a future crisis.

Added to this, the weakened government has indicated it may borrow more than it signalled in its manifesto - something which could also force the Bank to raise rates in the coming years.

Then again, there are a few reasons to think again. The first is that this is not the first time some MPC members have argued for higher rates, and then later changed their minds.

The path of the UK economy (and for that matter the political system) remains more unpredictable than for many years. And while no one is precisely sure what kind of Brexit lies in store, most economists would agree that most of the risks are tilted to the downside.

Household incomes are already being squeezed, and the high level of inflation today is likely to diminish as the impact of last year's sterling fall starts to wear off.

Image: Family budgets are being squeezed by falling wage growth and higher prices

Finally, it's worth considering the composition of the MPC itself. Most immediately, this was Kristin Forbes' last vote as an MPC member.

It is not given that whoever replaces her will want higher rates. Moreover, the governor, Mark Carney, tends to work through consensus and unanimity rather than as a single committee member. So if there is any chance the MPC is moving towards a rate hike, he is likely to try to signal it well in advance.

But Thursday's vote came tantalisingly close to an interesting piece of history.

As you might have noticed above, at present there are only eight members, because the Bank is still yet to appoint a successor to Charlotte Hogg (though this is expected imminently).

Image: Charlotte Hogg's departure means there are currently eight members of the MPC

That meant Thursday's vote was very nearly a tie: if one other member had voted for an increase it would have been a split vote. In those circumstances, Mr Carney would have been forced, as the governor, to give the casting vote.

The last time that happened was in the formative days of the MPC in 1998.

And while the MPC's changing composition means an interest rate hike is hardly an imminent prospect, it may be approaching sooner than you think.