Interest rates stay at 0.25% but three at Bank urge rise amid inflation fears
The Bank of England has kept interest rates on hold at 0.25%, but three policymakers called for a rise amid warnings that Brexit-fuelled inflation is set to surge further over the summer.
Minutes of the latest decision by the Monetary Policy Committee (MPC) showed two members - Ian McCafferty and Michael Saunders - joined outgoing rate-setter Kristin Forbes in voting for a rise to 0.5%, marking the first time that three members have dissented for more than six years.
Their call comes as the Bank cautioned that inflation is set to rise more than it predicted in last month's forecasts and is now likely to increase above 3% by the autumn.
This follows official figures earlier this week showing that inflation surged to 2.9% in May, which was higher than expected and takes the Consumer Prices Index (CPI) further above the Bank's 2% target.
The Bank said the pound's weakness since last week's shock indecisive General Election result would add to the pressure on inflation as sterling's fall since the Brexit vote has sent the cost of imported goods and energy soaring.
Minutes showed the MPC raising concerns that "inflation was projected to overshoot the target by more than previously expected and to remain above it throughout the three-year forecast period".
But it said there were "arguments in favour of leaving the policy rate unchanged".
"A slowdown in household consumption and gross domestic product as a whole had recently begun ... although consumer confidence had held up, there had been further signs of a slowing housing market and new car registrations had fallen sharply," the Bank added in the minutes.
Growth slowed more than the Bank expected, to 0.2% in the first quarter, but it believes this will be revised higher to 0.3%, while growth should edge up to 0.4% in the second quarter.
"Although the outlook remained uncertain, there had on balance been little clear news in the economic data to challenge the Committee's projection for moderate GDP growth over the remainder of the year," it added.
But the Bank sent out a warning shot that it would not be able to offer much relief to cash-strapped households.
"Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years," the minutes said.
Sterling rose against the US dollar on the news, turning positive at 1.27 dollars.
Against the euro, the pound broke above 1.14 euros and was up 0.7% on the day.
The MPC voting result was unexpected by economists, with Ms Forbes, who is leaving the committee before the next rates decision, being the lone dissenter in calling for a hike since March.
The minutes confirmed the Bank's "tolerance of above-target inflation" has reduced as inflation jumps higher.
It said it "stands ready to respond to changes in the economic outlook", but added that all policymakers agreed that any increases in rates would be "at a gradual pace and to a limited extent".
The Bank is facing a difficult balancing act as it weighs up the needs of an economy weighed down by uncertainty around the Brexit negotiations, with rising inflation hitting consumers.
High street figures earlier on Thursday revealed more evidence that households are reining in their spending, with retail sales tumbling by a higher-than-forecast 1.2% in May, against a 2.5% rise in April.
This came after official jobs data on Wednesday showed average earnings, adjusted to account for the impact of inflation, fell by 0.6% year on year in the three months to April.
James Knightley, senior economist at ING, said rates were still unlikely to go up any time soon, in spite of the unexpected 5-3 vote.
He said: " Given the BoE 'looked through' inflation at 5% plus in 2008 and 2011, we think the committee as a whole will look through this spike too.
"The economic and political uncertainty, we believe, is too great to get a consensus behind higher rates and with Kristin Forbes leaving the BoE this month, the hurdle to getting that consensus will soon be harder to achieve."
Ben Brettell, senior economist at Hargreaves Lansdown, said there was a chance of a rate hike if inflation continues to smash expectations.
"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," he said.