BoE's King Opposed Steady June Rates, July Hike Seen
Bank of England Governor Mervyn King and three other policymakers opposed this month's decision to hold interest rates at 5.5% and called for a hike, boosting expectations that borrowing costs will rise next month.
King, Deputy Governor John Gieve, Tim Besley and Andrew Sentance were outgunned by the remaining five members including Rachel Lomax, the other deputy governor, and Charles Bean, the chief economist, minutes of the June 6-7 meeting showed on Wednesday.
It was only the second time in the Monetary Policy Committee's decade-long history that the governor has been on the losing side of a rate decision. The first was the August 2005 rate cut when King had wanted no change.
Most experts had thought that at most only two members -- superhawks Besley and Sentance -- would have voted for a hike so soon after a May rise and the pound jumped as markets priced in a greater chance of rates hitting 5.75% next month.
"We got this one badly wrong, having expected a unanimous vote for an unchanged rate," said Daragh Maher, senior FX strategist at Calyon. "The market has justifiably moved to attach a greater than 50% chance to a July move."
A Reuters poll after the minutes were published showed 44 out of 64 economists are now predicting a quarter-point hike in July and a 40% probability of a rise to 6% by the end of the year.
The hawks on the committee argued that not much had changed since the May Inflation Report which had signaled one more rate rise. "There was no compelling reason to wait. Moreover, by raising now, the peak in interest rates could eventually be lower," the minutes said.
But the majority arguing for no change said a June rate rise would have surprised the market and raised money market rates more than was warranted.
They said that given high levels of personal debt, any rate rises should be measured -- borrowing costs have already been raised four times by a total of 100 basis points since last August -- and there were already signs that consumer spending and the housing market were slowing.
J. Sainsbury on Wednesday became after Tesco the second major British retailer in two days to warn of consumers tightening their belts. "It is very clear household budgets are becoming squeezed," said Sainsbury chief executive Justin King.
Tesco finance and strategy director Andrew Higginson, speaking at a Reuters summit on Wednesday, urged the BoE not to "overdose" on interest rate increases, saying consumer spending growth was already slowing.
But the MPC hawks argued in the minutes that any signs of a slowdown are still very tentative. House prices have picked up in almost every part of the country, they said.
Backing their case, underlying mortgage lending in May rose by its biggest amount, 5.8 billion pounds, in six months, figures from the British Bankers' Association showed on Wednesday.
The governor and others are also worried about relaxed credit conditions which are pushing up the stock of money. M4 money supply rose by an annual 13.8% in May, the highest rate since October, the BoE said on Wednesday.