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MPC turns hawkish, minutes set optimistic tone

Ben Brettell, Senior Economist, Hargreaves Lansdown:

Set against a backdrop of disappointing retail sales, slowing growth, shrinking real wages and heightened political uncertainty, it was somewhat surprising that three MPC members voted for higher rates at this week’s policy meeting.

Economists had expected a 7-1 split, with the soon-to-depart Kristin Forbes the lone voice calling for higher rates. In fact she was joined by Ian McCafferty and Michael Saunders in believing intensifying inflationary pressures justify an immediate 25 basis point increase.

It seems the willingness of the MPC to ‘look through’ higher inflation and leave rates on hold is wearing thin, and if inflation continues to surprise we could see higher rates by the end of the summer.

The minutes show policymakers are more optimistic than many economists about the UK’s prospects. Despite the current weakness in wage growth, they see this picking up sharply over their forecast period, and also believe lacklustre consumer spending will be offset by a pickup in other components of demand – notably exports, which are being helped by the depreciation of sterling and stronger growth elsewhere in the world. The minutes made no mention of last week’s surprise election result.

The pound jumped significantly on the news, gaining almost a cent against the dollar and three-quarters of a cent against the euro. The FTSE 100, which has seen a negative correlation with the value of the pound of late because of its large proportion of overseas earnings, fell by 30 points or so on the news.