Mark Carney has recent history on his side as he faces up to the biggest challenge of his leadership of the Bank of England and tries to keep interest rates at their record low.
Speculation mounted last week that the Carney’s grip on decision-making at the BoE was weakening when chief economist Andy Haldane said he might break ranks and join other dissenters who voted this month for Britain’s first rate hike in a decade.
Sterling rose and yields on two-year British government bonds, which are sensitive to the short-term view on BoE rates, hit their highest levels in seven months on Monday, building on a sharp rise last week.
Analysts at Nomura even predicted the Monetary Policy Committee (MPC) would raise rates as soon as its next meeting on Aug. 3.
But the dynamics of the MPC in recent years suggest that such a shift in stance remains unlikely for now.
None of the British central bank’s key in-house, or internal, rate-setters have voted against the governor on interest rates since 2011.
Five of the MPC’s seats, including the governor’s, are internal. The remaining four are held by external members.
And the last time a governor actually lost a vote on rates was in 2007.
As for the BoE’s massive buying of bonds, another big part of its stimulus for Britain’s economy, the last time a governor was outvoted was in 2013, when Mervyn King failed to get support for increasing the program.
Andrew Sentance, a former BoE rate-setter who is now senior economic adviser to PwC, said Carney’s influence over the MPC remained formidable despite the recent split.
“If the governor sets his face against an interest rate rise, as he has done, it creates a very big hurdle,” he said.
The MPC split 5-3 — its ninth seat is currently empty — when it voted on rates this month.
The closer-than-expected decision reflects the balancing act the BoE faces although so far, votes for a hike have come only from external MPC members.
Britain’s economy, the world’s fifth biggest, slowed in early 2017 and businesses are worried about Brexit. The weakness of Prime Minister Theresa May after her election flop is another source of potentially damaging uncertainty.
On the other hand, inflation has sped past the BoE’s 2 percent target and is set to pass 3 percent soon.
Unemployment has fallen to a 40 year-low, suggesting weak pay growth might pick up. And exporters are hoping to cash in on the fall in the pound since the vote a year ago to leave the European Union, and on an improving global economy.Of course, economic data between now and August could swing the MPC in either direction.
But last week, Carney made clear that he felt the time was not right for a rate hike. He stressed the weakness of pay growth and said he wanted to see how Brexit impacts the economy in the coming months.
The BoE cut rates to 0.25 percent in August, when it feared the referendum vote would hammer the economy.
Returning them to 0.50 percent would still leave rates very low by historical standards, although it would represent the first hike since 2007 and could add to caution among consumers about their finances.
The Governor’s Influence
For the MPC to vote to raise rates in August would almost certainly require support from a second internal member alongside Haldane, assuming he does actually change his vote.
It would also probably require new external MPC member Silvana Tenreyro to vote against the governor at her first meeting, an unusual step for new hires.
Tenreyro is replacing one of the three dissenters.
“I am not convinced that we are much closer now to an interest rate rise,” said Sentance, who has long called for a return to higher borrowing costs. “Mark Carney’s stance is decisive and if anything the regime at the Bank since he became governor has been very focused around his own position.”
Carney took over as governor in 2013 and since then the MPC has voted in a much more uniform way. Some critics have said that reflects how Carney effectively took monetary policy decisions alone in his previous job running the Bank of Canada.
MPC member Kristin Forbes — one of the dissenters on rates — noted in her last speech before leaving this month how dissent on the panel withered away almost completely after 2013.
She said the change probably reflected an expansion of the BoE’s responsibilities in that year rather than Carney’s arrival in Threadneedle Street.
“What is even more striking is changes in the pattern of where the dissents come from,” she said. “Not a single dissent since 2013 has come from an internal member.”
Ahead of the MPC’s Aug. 3 meeting, economists are waiting as keenly to hear the tone of comments by MPC members as they are for the economic data that could seal the decision in August.
Sam Hill, at RBC Capital Markets, said the views of Ben Broadbent, deputy governor for monetary policy, would be key. He has largely aligned himself with Carney but had a reputation for hawkishness when he was a Goldman Sachs economist.
“I think it’s really important to see what Broadbent thinks. That will really shape expectations,” Hill said.
However, BoE watchers will have to wait a bit longer to get a sense of the mood on the MPC. Carney is its only member who is due to speak publicly this week. (Editing by Catherine Evans)