The Bank of England Monetary Policy Committee is split, with some members seeing the case for an earlier hike, although the vote for unchanged policy was unanimous, the May minutes revealed.
Some members believe there is likely less spare capacity than the BOE’s central view of a 1 to 1.5% of GDP range, and some believe there is more. The MPC has said rate hikes, when they come, will be gradual but members note that the sooner hikes start, the more gradual the rate path will be.
“It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy,” the minutes said.
MPC member Ian McCafferty has publicly made this ‘gentle means early’ argument, and it is a matter of fact that when Bank Rate peaks at a point in time, the earlier the first hike comes the gentler the slope of the curve up to that peak point.
While MPC members placed different weights on this and other arguments “for some members the monetary policy decision was becoming more balanced,” the minutes said.
The minutes also noted that gradual rate hikes “ran a greater risk of a build up in financial imbalances, particularly in the housing market.”
The BOE, however, has made a clear division of responsibility, with its Financial Policy Committee tasked with tackling financial risks.
The MPC said “the mitigation of such risks was, in the first instance, the responsibility of the FPC: monetary policy should only be a last line of defence.”
On the amount of slack remaining in the economy, which is a key policy driver, the minutes noted only that “most” MPC members thought it was in the 1 to 1.5% range cited in the May Quarterly Inflation Report.
Previous public comments show MPC member Martin Weale believes there is likely less than 1% spare capacity, with BOE Governor Mark Carney and David Miles thinking there is likely more, and McCafferty highlighting how on slightly different assumptions there could even be zero.
The minutes identified a number of areas where MPC members were divided over the extent of slack left in the economy.
These included what proportion of the self-employed should count towards labour market slack and how much increased employment will add to productive capacity.
The minutes noted the central forecast in the May Quarterly Inflation Report was that the rate at which slack was being absorbed was expected to slow from the end of this year as growth eased and productivity picked up, but again there was a range of views among MPC members on this.