Policymakers at the Bank of England have been giving mixed signals as to whether interest rates will be hiked next month, suggesting there could be a split vote at the May monetary policy committee meeting.
Sterling took a battering overnight after Bank governor Mark Carney suggested that Brexit uncertainty could delay rate rises even further. But MPC member Michael Saunders today brushed aside recent weak economic data, saying that the significance of the slowdown is ‘questionable’.
He added: ‘Economic activity in March, and especially retail sales, was hit by unusually heavy snow. Previous experience suggests that such snow effects typically reverse in the next month or two.’
Warning signal: Mark Carney cautioned markets yesterday that a rate rise in May is not a certainty
This, Saunders added, means that the Bank’s ‘foot no longer needs to be so firmly on the accelerator’.
‘Any further tightening is likely to be at a gradual pace and to a limited extent,’ he said. ‘A key point is that “gradual” need not mean “glacial”.’
Saunders’ comments contrast with those of Mr last night, who cautioned markets yesterday that a rate rise in May is not a certainty.
He told the BBC in Washington: ‘Prepare for a few interest rate rises over the next few years. I don’t want to get too focused on the precise timing.’
He noted that some of the recent data on the UK economy had been ‘softer’ than it might have been – including the fall in inflation to a 12-month low of 2.5 per cent last month and a 1.2 per cent drop in retail sales.
Saunders was one of two MPC members to vote for a rate hike in March, from 0.5 per cent to 0.75 per cent, in order to curb growing inflation triggered by the collapse in the Brexit hit pound.
But inflation fell back to 2.5 per cent from 2.7 per cent in March, a one year low, easing pressure on the Bank to act.
And the Office for National Statistics also revealed this week that wages are now rising faster than inflation.
Divided opinion: The Bank of England rate setters are at odds over whether to hike interest rates next month, suggesting there could be a split vote
Average wage increases up to 2.8 per cent in February, 0.1 per cent above the inflation figure for that month.
In decline: The pound tumbled following Carney’s comments, falling from $1.42 to $1.40
The pound tumbled following Carney’s comments, falling from $1.42 to $1.40.
Connor Campbell, financial analyst at SpreadEx, said: ‘There was a slight improvement from sterling as Friday went on, thanks to a hawkish rebuke to Carney’s Thursday dovishness from MPC member Michael Saunders.
‘However, the pound-boosting potential of these comments was tempered by the fact that a) this wasn’t some dove-to-hawk switch given Saunders’ stance last month, and b) he doesn’t feel that ‘the exact timing of rate changes must be totally predictable or signalled in advance’.’
The Bank of England will reveal on May 10 what decision the MPC has made on rates.