MPC votes 7-2 to hike interest rates to 5%: Who are the dissenters?

The Bank of England’s Monetary Policy Committee today voted by a margin of 7 to 2 for a rate hike of 0.5 percentage point to 5 percent.

The MPC’s hand was forced into a bigger hike at its June meeting, after rising 0.25 percentage points on the last two occasions after consumer price inflation failed to fall in May and remained at 8.7 percent.

The monetary policy summary published along with the decision also highlighted developments since the last meeting that have influenced the decision, including skyrocketing expectations about where key interest rates could peak, much higher government bond yields and a ‘remarkable’ rise of the mortgage interest.

However, it said it was not deterred from its mandate to bring inflation back to its target of 2 percent.

Among the MPC members who voted in favor of the 50 basis point increase were Andrew Bailey and Ben Broadbent, governor and deputy governor, respectively, and outspoken chief economist Huw Pill.

However, two members, Dr Swati Dhingra and Silvana Tenreyro, voted to keep the rate at 4.5 percent.

Dr. Swati Dhingra, a Princeton graduate, is an associate professor at the London School of Economics, director of The Royal Mint Museum and a member of the steering committee for the UK Economy 2030 Inquiry.

She joined the MPC in September 2022 and has since voted at every meeting to keep the base rate lower than the committee’s consensus.

Silvana Tenreyro, who has been with the MPC since 2017, is an award-winning professor of economics at LSE, has worked at the Federal Reserve Bank of Boston and has worked at the MPC of the Central Bank of Mauritius.

Tenreyro has been more lenient than MPC peers nine times since the BoE began raising rates in December 2021.

The MPC said Tenreyro and Dhingra’s position was based on two key factors.

It explained: “First, as the energy price shock and other global cost-cutting shocks continued to reverse in the course of 2023, commodity price inflation should decline sharply, which should, with some time lag, reduce the associated persistence in domestic wage and pricing would decrease. .

“Contrary to the strength of recent results, forward-looking indicators pointed to material declines in future wage and price inflation.”

Second, the couple emphasized the “lagging” effect of monetary policy, meaning that increases in base interest rates may take some time to feed through the economy and affect inflation.

Under this line of reasoning, the MPC said: ‘The current bank rate setting is therefore likely to push inflation below target in the medium term.

“Recent substantial increases in market yields would reinforce this, as they would mainly affect inflation in late 2024 and beyond, after which energy prices would fall from their peaks and previous rate hikes would have significantly lowered inflation.”

The Bank of England has faced criticism since rising inflationary pressures began to seep into the economy in late 2021.

The bank has consistently underestimated both the pace and the “stickiness” of consumer price inflation, and critics say it should have started rate hikes sooner and more aggressively.

This has led the bank to turn to external help to check how it forecasts inflation, following concerns from Westminster.

Perhaps unsurprisingly, Governor Bailey and Deputy Governor Broadbent have been on the winning side of MPC splits on every occasion.

However, Tenreyro and Dhingra are not outliers when it comes to disagreeing with the majority’s decision.

BoE data shows that Jonathan Haskel and Catherine L Mann have been the most aggressive among their peers, voting for higher rates than peers four and five times since November 2021, respectively.

Haskel is Professor of Economics at Imperial College Business School, having previously held senior positions at Queen Mary University of London, and has taught at the University of Bristol and London Business School.

He was a non-executive director of the UK Statistics Authority until earlier this year and previously worked for the Competition and Markets Authority.

Dr. Mann is a professor at Brandeis University who formerly worked at the European Investment Bank and served on the Council on Foreign Relations and the American Economic Association.

She also served as chief global economist at Citibank from 2018 to 2021.

Markets expect the hawks to have their way, with the base price now peaking at 6 percent.

Thomas Pugh, economist at RSM UK, said: ‘We are still skeptical that interest rates should go all the way to 6%, as priced in by the financial markets.

After all, the MPC acknowledged that “the higher proportion of fixed-rate mortgages meant that the full impact of the bank rate hike would not be felt for some time yet.”

Indeed, with at least 800,000 fixed mortgages moving to significantly higher rates in the second half of this year, much more pain is clearly ahead for households.

But as the MPC did not hesitate to vote for a 50 basis point hike today and the labor market will remain tight for some time, more rate hikes are likely to come.

“25 basis points in August and September seems likely, but there is clearly a high probability that one of these increases will be another 50 basis points.”