Yesterday’s fall in inflation along with last week’s quarterly Inflation Report had dampened earlier expectations of a possible shift in voting patterns among the Bank of England’s Monetary Policy Committee (MPC). However, rumours of dissent were correctly founded with minutes from the August MPC meeting showing the first split vote since July 2011, with two members of the external members of the MPC, Ian McCafferty and Martin Weale, voting for an immediate 25 basis point increase in the Bank Rate.

For the majority of members there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate. In the central projection for inflation in last week’s quarterly inflation report, inflation was only forecast to reach the 2% target at the end of the three-year forecast period. It was also suggested that growth was likely to ease as pent-up demand faded, slowing the pace at which slack was being mopped up.

For the two dissenting members, economic circumstances were sufficient to justify a rise in the Bank Rate. They noted the rapidly falling unemployment rate alongside survey evidence suggesting the tightening of the labour market created a prospect for increased wage growth. In their opinion, it was possible that wages were lagging behind the developments in the labour market to some extent. 

The results of today’s minutes will refuel speculation of a rate rise before the end of the year, something that appeared to have lost considerable momentum with yesterday’s lower inflation figures, and will add to the uncertainty .

Cebr still expects the first rate rise to come in early 2015, although it is unlikely that inflationary pressure is going to force this decision upon the bank. Downward pressure from global developments and retailer competition leave petrol and diesel prices poised to fall, which alongside low food prices should keep inflation figures subdued. However, rates should still be increased gradually in line with the general as the economy continues to recover. Gradual increases in the Bank Rate will bring interest rates back to a new normal level, which will be lower than that seen before the crisis at about 2% and would be unlikely to derail the recovery.    
 

UK consumer price index, annual percentage change