The battle lines for a key Bank of England decision on interest rates have been made clearer after deputy governor Sir Jon Cunliffe became the latest Threadneedle Street official to voice publicly his opposition to higher borrowing costs.
Cunliffe came to the support of the governor, Mark Carney, in saying that it was not yet time to raise interest rates – setting the scene for one of the most closely fought decisions of the Bank’s monetary policy committee when it meets early next month.
The MPC voted 5-3 in favour of leaving rates on hold at 0.25% at its most recent meeting, but the City was taken aback when the Bank’s chief economist, Andy Haldane, said he had been close to abandoning his no-change stance.
Haldane’s comments raised speculation that the Bank is coming close to reversing the emergency quarter-point cut in official borrowing costs made in August 2016 when the MPC was seeking to shore up confidence in the wake of the Brexit vote.
But Cunliffe said that raising interest rates at the current time was not desirable because it would add to the squeeze on living standards caused by prices rising more quickly than wages.
Speaking on the BBC Radio 4 Today programme, Cunliffe said consumer spending was slowing as households’ real incomes were squeezed by higher inflation. “We expect some of that slowing to be offset by growth in business investment, growth in exports. And I want to see how that plays out.
“[We] do have to look at what’s happening to domestic inflation pressure, and I think that, on the data we have at the moment, [it] gives us a bit of time to see how this evolves.”
Inflation as measured by the consumer prices index is 2.9% and expected to rise further above the government’s 2% target over the coming months.
The three MPC members who voted for a rate rise at the last meeting believe the lowest unemployment rate since the 1970s will generate pressure for higher wages and that, unless policy is tightened now, there is the risk that a more aggressive stance will have to be announced later.
One of the three “hawks” – Kristin Forbes – is no longer an MPC member and has been replaced by Silvana Tenreyro, whose views on the necessity of a rate rise are unknown.
With Haldane indicating that he might join Ian McCafferty and Michael Saunders in voting for higher borrowing costs, and Cunliffe siding with Carney, the result will be decided by another deputy governor, Ben Broadbent, Jan Vlieghe, the former hedge fund economist, and Tenreyo.
The MPC normally has nine members but is down to eight as a result of the resignation of Charlotte Hogg for failing to declare that her brother worked at Barclays.
In the event of a 4-4 tie at the next meeting, Carney would have the casting vote.