The pound rose sharply yesterday after it emerged that a member of the Bank of England’s Monetary Policy Committee had voted for a rise in interest rates for the first time in nearly two years.
Andrew Sentance voted to increase the Bank rate from 0.5 per cent to 0.75 per cent at the meeting this month, minutes revealed.
Mr Sentance was outvoted 7-1 at the meeting, which kept rates unchanged at 0.5 per cent. But it was the first time since August 2008, when Tim Besley voted for an increase from 5 per cent to 5.25 per cent, that a committee member had voted for tighter monetary policy — and the news took markets by surprise.
In its own vote yesterday, the US Federal Reserve pledged to hold rates at record lows to ensure that America’s recovery stayed on track. Indicating that Europe’s debt crisis posed a risk to the US economy, the Fed retained its pledge to keep rates at exceptionally low levels for an “extended period”.
With demand for sterling also buoyed by the view of Moody’s that George Osborne’s first Budget was likely to help Britain to retain its triple-A credit rating, the pound rose to $1.4943, its highest level against the dollar in six weeks.
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Economists said that while Mr Sentance was regarded as one of the committee’s more hawkish members, his decision was still unexpected. Peter Dixon, senior economist at Commerzbank, said: “I’m very surprised that we actually had somebody even thinking about voting for rate hikes at this stage in the game. The UK is struggling to recover from the deepest recession in at least 30 years and now is not the time to raise the heat on monetary policy.”
Simon Hayes, chief UK economist at Barclays Capital, said: “Mr Sentance’s dissent is not wholly surprising, given his recent hawkish comments in a Sunday Times comment piece. The more material question is whether other committee members are likely to follow suit.”
The minutes indicated that Mr Sentance was concerned that inflation was proving “resilient in the aftermath of the recession, casting doubt on the future dampening impact of spare capacity on inflation”. He had also noted a recovery in demand, both at home and abroad, with the main measures of UK demand in recent quarters actually exceeding “typical pre-recession rates”.
Elsewhere, the CBI’s latest monthly distributive trades survey indicated that high-street sales improved by less than expected in early June, despite the boost provided by the World Cup. The survey showed that a 5 per cent balance of retailers reported lower sales volumes than a year ago in the two weeks to June 9 — although this was an improvement on the 18 per cent balance reporting a decline in May.