Pound surges after Bank of England’s shock interest rate vote

There has been an unexpected leap in the number of Bank of England policymakers supporting a rise in interest rates, as inflation soars above target.

Financial markets and economists believed the monetary policy committee (MPC) would vote 7-1 to maintain the rate at its post-Brexit referendum level of 0.25%.

But a 5-3 split was revealed – with external members Ian McCafferty and Michael Saunders joining outgoing rate rise advocate Kristin Forbes in supporting an increase back to its post-crisis level of 0.5%.

It was the closest the MPC has come to supporting a rise since 2007 because it currently has only eight members after Charlotte Hogg quit in March.

In the minutes of the rate-setting meeting, the Bank said it now expected inflation to exceed 3% by the autumn – higher than it had forecast a month ago – having reached an annual rate of 2.9% in May.

The Bank has previously signalled it is prepared to tolerate an overshoot of its 2% inflation target because to raise rates to help compensate would risk choking economic growth – slowing this year after the Brexit vote.

The MPC’s vote reveals growing concern at the pace of price increases – largely a consequence of weaker sterling since the referendum, which has pushed up the cost of imported goods.

The Bank said further sterling struggles since last week’s indecisive General Election result would add to the pressure on inflation.

The minutes said: "Inflation was projected to overshoot the target by more than previously expected and to remain above it throughout the three-year forecast period."

But the statement said there were also "arguments in favour of leaving the policy rate unchanged".

It continued: "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."

Separate figures released by the Office for National Statistics (ONS) showed rising prices were a "significant factor" behind slowing retail sales in May.

Sterling jumped a cent against the dollar to almost $1.28 after the vote revelation while the FTSE 100 extended losses – going 1% lower, reflecting the pound’s gains.

Ben Brettell, senior economist at Hargreaves Lansdown, said: "Set against a backdrop of disappointing retail sales, slowing growth, shrinking real wages and heightened political uncertainty, it was somewhat surprising that three MPC members voted for higher rates at this week’s policy meeting."

He added: "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."

(c) Sky News 2017: Pound surges after Bank of England’s shock interest rate vote