Bank rate held but May hike expected

While the vote saw rates held steady at 0.5 per cent where they have been since November’s rise of 0.25 per cent, two members of the Bank’s nine-member MPC - Ian McCafferty and Michael Saunders - backed an increase in rates to 0.75 per cent.

The departure from February’s unanimous vote came as the MPC said “ongoing tightening” was likely to be needed to return inflation back to the Bank’s 2 per cent target.

Tej Parikh, senior economist at the Institute of Directors, said: “Business leaders will welcome the Bank of England’s decision not to spring any surprises this month, but firms and households will be on tenterhooks for what comes in May.

“The Bank has been paving the way for a rate rise, but must tread lightly until there is richer evidence of growing inflationary pressures, to avoid unnecessarily placing a speed bump in the way of economic activity.

“The future path for prices has been muddied by recent developments. A dip in inflation – with the impact of weaker sterling finally washing through – alongside softer economic growth and the potentially dampening impact of snowy weather on business activity in Q1, certainly made the case for holding rates this month.

“The Bank has also been focusing in on Brexit negotiations and tightness in labour market. On the former, the transition agreement has removed a major hurdle for economic confidence, and for the latter near record lows of unemployment have seen some pick-up in earnings. While both could increase inflation, the effect is likely to be limited, as businesses still face uncertainty around the precise nature of Brexit and SMEs currently do not have the capacity to raise wages significantly, given high costs and productivity constraints.

“All in all, it’s unclear how prices will evolve from here, so it’s best to wait and see.”

Howard Archer, chief economic advisor to the EY ITEM Club said: “Following an evident shift in the MPC’s mood music in February towards a markedly more hawkish tone, March’s meeting continued that theme. Although the MPC’s vote delivered a majority in favour of no change in Bank Rate, two members known for their past hawkishness dissented supporting an immediate 25 basis points rise.

“The question is whether three of their colleagues will jump ship and join the ‘tightening two’ to form a majority for pushing through a rate rise when the Committee meets next in May. The wording of the minutes suggest that’s a strong possibility. Granted, the MPC conceded that signs of a pick-up in domestically-generated inflation remained scant, with profit margins and wages rising at rates below those consistent with the 2 per cent inflation target. And the signalling towards a near-term rate rise was somewhat weaker than we saw in MPC meetings running up to last November’s rise in Bank Rate.”