Bank of England split 7-2 over interest rates - as it happened

That’s probably all that we (or anyone else!) has to say about the Bank of England’s minutes right now.

For full coverage and reaction, scroll back to 9.30am.

Or check out Larry’s news story: Bank of England split on interest rates reopens prospect of a rise in 2014

His comment: Interest rate rise is coming – but data must be strong enough for all on MPC

And our round-up of expert reaction is here: Bank of England split on interest rates – what the economists say

The split at the heart of the Bank of England highlights how hard it is to interpret the state of the UK economy, argues Professor John Thanassoulis of Warwick Business School.

Here’s his take on today’s Minutes:

The economy is recovering as GDP has been growing; house prices have been rising and unemployment has been falling. Thus in the near term one would expect inflation to start picking up. This will occur as the labour market tightens so that workers can start to bargain for higher wages.

“This all points to inflation rising and an early initial rate rise. And yet this month’s inflation figure is down. This could suggest that the economic picture is worse than the above analysis suggests.

“However, the ONS highlights other reasons for the month’s figure: the late timing of the summer sales due to good weather mean clothes prices were unusually high in June this year and so the fall to July more pronounced than usual; the strengthening march of Aldi and Lidl, the supermarket discounters, has begun a retail price war lowering prices; the low ebb of the Eurozone has made sterling appreciate so that imported goods appear cheaper when priced in pounds.

“If these reasons are correct then the low inflation figure is likely to be an aberration as the sales and price war effects run their course. One would expect UK economic growth to continue in September and wage growth to follow in due course.

Which of these competing explanations applies is unclear.”

Oh, the perils of economic forecasting....

Away from the drama of the 7-2 vote, today’s minutes show that the Monetary Policy Committee is scrutinising every piece of economic data that comes their way.

The “Immediate Policy Decision” outlined the wide range of views about the amount of spare capacity remaining in the economy. As outlined earlier, a majority of policymakers saw little inflationary risk – especially with wage growth still weak (much to the IoD’s chagrin).

Economics editor Larry Elliott reckons these seven MPC members they won’t be swayed anytime soon:

There has been nothing in the recent data to make any of the seven MPC members voting to keep rates on hold change their minds. Indeed, since the August meeting official figures have shown inflation falling to 1.6% and earnings growth dipping to 0.6%. The international outlook has darkened, with activity in the eurozone coming to a halt in the second quarter and tension mounting in the Ukraine.

What’s more, the message that the Bank is moving closer to a rate rise may make it harder to raise borrowing costs. Consumers may start to spend less in anticipation of their mortgage costs rising, while a stronger pound will make imports cheaper and thus bear down on inflation.

The MPC is now operating on a month-by-month basis, with members truffling through each and every piece of new data for clues as to what is happening to the economy. Rates will only rise if the incoming data is strong enough to make three other members of the MPC join Weale and McCafferty. As things stand, it is hard to see that happening.

Analysis: Interest rate rise is coming – but data must be strong enough for all on MPC

UK interest rates are now more likely to rise before the next general election than not, according to Ladbrokes’ latest odds.

Ladbrokes has cut the odds on the first rate hike coming before May 2015, having seen the minutes of this month’s MPC meeting. Spokesman Alex Donohue explains:

“Today’s MPC minutes have shaken up our rate market significantly.

The latest news from Threadneedle Street now points to a pre-election rise being the most likely outcome.”

Interest rates to rise before the general election

• Yes: 8/11
  
• No: evens
  

How many members of the MPC will vote in favour of a rise in September’s meeting?

• 0-1: 6/4
  
• 2: 6/4
  
• 3 or more: 5/2
  

We’re running a poll, asking when readers think the first UK interest rate rise will come:

Poll: when will UK interest rates rise?

The emergence of two hawks on the Monetary Policy Committee makes a rate rise in 2014 a little more likely, says Christian Schulz, senior economist at Berenberg bank.

He cites three caveats, however.

(1) Dissenters do not always signal an imminent majority shift: there was a run of dissenting votes in 2011 as well, but the majority of the MPC stuck to the dovish course then.

(2) Wage growth has slowed even more according to data releases since the meeting, with weekly earnings falling by 0.2% yoy in June.

(3) Geo-political risks have increased and affect the UK’s largest trading partner, the Eurozone. In our view, the probability for a first rate hike remains finely balanced, but the majority is likely to hold-out until February next year. That would still be a bit before current market expectations.

James Knightley of ING has produced a very handy summary of today’s Bank of England minutes:

The minutes to the August Bank of England monetary policy meeting showed that the committee voted 7-2 in favour of keeping Bank Rate at 0.5% with Martin Weale and Ian McCafferty both voting for a 25bp interest rate rise. This is the first time there wasn’t a unanimous decision in just over three years. The committee voted 9-0 in favour of leaving QE at £375bn.

The two dissenters argued that “the degree of spare capacity had diminished sufficiently” and that a tightening labour market “created a prospect that wage growth would pick up”. They also noted that wages were a lagging indicator and “it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them”. Even after a 25bp rate rise they argued that “monetary policy would remain extremely supportive”. It would also help facilitate the MPCs “aspiration that the rises in Bank Rate should only be gradual”.

However, the majority still need a fair bit of convincing. The minutes stated that “for most members, there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate”. They felt that the rate of growth would moderate while inflation was expected to “reach the 2% target only at the end of the three-year forecast period”. They also cited weak wages and the possibility labour market slack may have been greater than previously thought. By delaying rate hikes it would “allow the expansion to become more entrenched”. Indeed, raising rates too early in the absence of wage rises could increase “the vulnerability of highly indebted households”, while also adding to upward pressure on sterling.

Knightley reckons, though, that Martin Weale and Ian McCafferty will remain in the minority for a while yet.

Yesterday’s low inflation numbers, the lack of wage growth and concerns about Eurozone growth – the UK’s largest trade partner, suggest that in the absence of upside activity data shocks the majority will continue to opt for the status quo in the next few months. Indeed, it currently looks more likely to be February when we see the first rate rise than our current published forecast of November.

Martin Weale and Ian McCafferty were outvoted because other Bank of England policymakers believe there is “insufficient evidence of inflationary pressures” to justify a rate rise.

They want to leave interest rates at their record low of 0.5% until there are clear signs that wages are rising.

The minutes say:

Given the risk that an increase in labour supply or persistent concerns over job security would result in weak wage growth continuing for longer, there would be merit in waiting to see firmer evidence that solid increases in pay growth were in prospect before tightening policy.

The latest data showed that average earnings, excluding bonuses, are growing at just 0.6% per year. Inflation is currently 1.6%, meaning real wages are shrinking by 1%.

The minutes show that Ian McCafferty and Martin Weale both argued that the UK economy was strong enough to justify an immediate rise in bank rate.

They believe that earnings across the UK economy are likely to pick up in the months ahead, meaning the Bank of England should start to tighten monetary policy now.

Here’s the key section from the Minutes:

For two members, in particular, economic circumstances were sufficient to justify an immediate rise in Bank Rate. These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up.

They noted that it was possible that wages were lagging developments in the labour market to some extent. If that were true, wages might not start to rise until spare capacity in the labour market were fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them.

Weale and McCafferty also argued that there was no guarantee that the risks of a negative financial market reaction would be lessened by holding rates down for longer. They could even be “augmented”, they warned.

Just five minutes until the Bank of England minutes are released.....

Marc Ostwald of ADM Investor Services explains what to watch for:

Dissent cannot be ruled out within the MPC minutes, even if the consensus looks for 9-0, though that consensus appears to favour Martin Weale as the dissenter, despite the prior evidence, which suggests that Weale can appear voice hawkish opinions, but “talking the talk does not translate (de facto) into walking the walk”.

Be that as it may, the focus will be on the background debate to last week’s Inflation Report, which will inevitably highlight that MPC views on the economy remains very divergent. Of more interest perhaps, will be the discussion on market rate trajectories and indeed MPC guidance, even if MPC opinions will hardly have been unitary. But perhaps most attention (as ever) should be devoted to the MPC Agents’ reports, as signals from non-construction related sectors have been decidedly mixed, and even construction appears to be hitting supply related buffers, be that in terms of labour skills or raw materials constraints.

The Argentinian default battle has taken another twist overnight.

President Cristina Fernández announced plans for a voluntary debt swap, which would allow it to dodge a US court ruling forcing it to repay ‘hold-out creditors’ who refused to take part in debt restructuring since its 2001 default.

That court ruling forced Argentina to default again last month, as it is prevented from repaying its other creditors. Buenos Aires refuses to repay its holdouts (aggressive hedge funds); Fernández’s plan is to issue bonds under Argentinian law, beyond the reach of US judges.

Argentina also plans stop using Bank of New York Mellon as a trustee and instead make bond payments via an account at Banco de la Nación in Buenos Aires.

The FT has more details (paywall, sorry).

And as Sky News reports, President Cristina Fernández appeared rather emotional, and on the verge of tears, saying:

“Excuse me if I get a little nervous, I usually have more poise.

“However, I really feel that we are living a moment of great injustice in Argentina.”

An ambitious plan to merge two of Britain’s biggest construction firms appears to have failed.

Balfour Beatty rejected the latest proposal from rival Carillion this morning, insisting that it wasn’t in its shareholders’ interests.

Balfour criticised Carillion, for failing to address:

“The considerable risks associated with the proposed business plan, including the strategy to significantly reduce the scale of the UK Construction business when it is poised to benefit from a recovery in the market.”

The Takeover Panel had given Carillion until close of play tomorrow to ‘put up or shut up’, and the latter course looks more likely.

Shares in Balfour have tumbled 5.5% this morning. Carillion, which had sweetened its merger terms yesterday, are down 2%.

Over in Germany, the latest survey of factory gate prices has brought little respite to Europe’s low inflation problem.

The German Producer Prices index, which tracks how much firms receive for their wares, fell by 0.1% last month, and was 0.8% lower than July 2014. It was driven down by falling energy prices.

Economists had expected prices to be flat month-on-month, and 0.7% lower year-on-year.

Those producer prices feed through to the wider economy, and could help keep consumer prices below target.

Good morning, and welcome to our rolling coverage of the financial markets, the economy, business and finance.

Like house prices and the weather, interest rates are something of a British obsession at present. So the minutes of the latest Bank of England monetary policy meeting, released at 9.30am today, are eagerly awaited in the City and beyond.

There’s a possibility that at least one member of the MPC broke ranks and voted to raise bank rate. This would be the first dissent since 2011.

Alternatively, the nine-strong committee could have remained united in leaving borrowing costs unchanged, which would probably kibosh talk of an early rate rise.

The details of the minutes should also show whether many committee members believe that most of the spare capacity in the UK economy has now been used up.

Yesterday’s drop in inflation appears to have put a 2014 rate rise off the agenda - but today’s minutes could change the picture again....

Stan Shamu of IG explains:

The focus will be on the BoE MPC meeting minutes, where the market will be looking for any signs that some members are getting hawkish.

Last week’s BoE inflation report showed there was “a wide range of views” over the amount of slack that still needs to be mopped up. However, Britain’s weak wage growth remained a major worry, so we’ll see what the MPC said about that too.

Not too much else on the agenda today. We get the latest survey of the eurozone construction sector at 10am BST, and the CBI’s survey of UK industrial trends at 11am.

I’ll be tracking the main events through the day...