A pedestrian walks out of Bank London Underground station exit in view of the Bank of England in the City of London, U.K. (Photographer: Simon Dawson/Bloomberg)

Haldane Joins BOE Hawks, Raising Chance of Summer Rate Hike

(Bloomberg) -- Bank of England Chief Economist Andy Haldane unexpectedly threw his support behind an immediate interest-rate increase, defying the majority of policy makers who voted to keep the rate unchanged.

The pound rose on the news of a unexpected 6-3 split on the Monetary Policy Committee, with Haldane joining Ian McCafferty and Michael Saunders in calling for a quarter-point hike. It’s first time Haldane has dissented since joining the panel in 2014.

Haldane Joins BOE Hawks, Raising Chance of Summer Rate Hike

With the majority, including Governor Mark Carney, voting for no change, the benchmark rate stayed at 0.5 percent. But the split leaves the door open for an increase at the next meeting in August, and investors now give that odds of about 65 percent, up from 50 percent going into the meeting. The pound reversed a 0.5 percent loss and traded 0.5 percent higher at $1.3235 as of 1:38 p.m. in London.

In a further surprise move, policy makers also voted to change the guidance on when they will consider reducing the stock of debt purchased in the bank’s quantitative easing program. Having previous said they wouldn’t consider selling the bonds until the key rate reached 2 percent, they’ve now cut that to 1.5 percent.

Central banks across the globe are inching toward tighter policy after years of extraordinary stimulus. The BOE’s decision came hours after Norway’s central bank fine-tuned a plan to raise interest rates for the first time in seven years.

Last week, the U.S. Federal Reserve raised interest rates and the European Central bank set an end-date for asset purchases. The Swiss National Bank leaned more dovish on Thursday on concern about the strength of the franc.

What Our Economists Say:

Haldane’s “surprise switch in favor of a tightening at the Bank of England’s June meeting supports our view that if the data evolves as we expect over the coming six weeks, the Monetary Policy Committee will hike rates in August.”
-- Dan Hanson and Jamie Murray, Bloomberg Economics

The decision is the first since the BOE backed away from a rate increase in May, saying it needed more time to assess the underlying health of the economy. Recent economic data has showed a pick-up in services and retail sales, partly driven by hotter-than-average public holidays and the wedding of Prince Harry and Meghan Markle, while manufacturing output and wages disappointed.

Brexit Outlook

The U.K. central bank is trying to judge how the decision to leave the European Union is hitting both the supply and demand sides of the economy. While uncertainty about trading arrangements after Brexit has dented investment, policy makers also estimate that historically low growth rates may nevertheless fan inflation now.

BOE officials said that the data since the May meeting were largely in line with their prediction that the first-quarter slowdown was temporary. The majority of voters this month said there was still some value to seeing how the data evolve, whereas the minority pushing for tighter policy said those benefits were limited.

While all on the MPC agreed that slack in the labor market is now largely used up, the hawks saw a risk of stronger-than-expected wage gains and argued that a move now would reduce the risk of having to be more aggressive later.

That echoes a view expressed by Haldane exactly a year ago, when he said there were risks to waiting to tighten and that he even considered voting for a rate increase at the time.

Colorful Speeches

The chief economist has been at the BOE for more than a quarter century, and he often makes headlines with his colorful speeches and analogies. He once likened the poor forecasting record of economists to the case of Michael Fish, a U.K. weatherman who in 1987 wrongly downplayed the chance of a deadly hurricane hitting Britain.

In the discussion of the stock of asset purchases, the MPC said any reductions would happen at a gradual and predictable pace. That echoes the bank’s guidance on interest rates, which they say will rise in a gradual pace and to a limited extent.

The decision to lower the guidance on QE bond sales reflected officials’ view that the effective lower bound of the key interest rate was lower than before. That gives them more space to cut rates, should such action be needed.

“There may be a feeling in central banking that it’s more desirable to reduce the stock of asset purchases and slim their balance sheets sooner rather than later,” said Philip Shaw, an economist at Investec in London. “But on our interest-rate forecast, we wouldn’t even get the bank rate up to 1.5 percent before 2020.”

While the BOE didn’t hold a press conference for this decision, Carney will give the annual Mansion House speech in the heart of London’s financial district later on Thursday.

©2018 Bloomberg L.P.