The Bank of England Has Rarely Been This Split Over Inflation

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(Bloomberg) — This week’s interest-rate cut at the Bank of England was perhaps the most divisive yet under Andrew Bailey’s governorship. 

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Splits over how to squeeze out stubbornly high inflation have been common in recent years. However, Thursday’s vote saw the BOE’s two most senior voices on monetary policy pitted against the governor — an eyebrow-raising divide at a crucial moment given inflation is predicted to hit 4% in September. 

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Deputy Governor Clare Lombardelli joined Chief Economist Huw Pill in opposing the narrow 5 to 4 vote to cut interest rates by a quarter-point. Lombardelli’s dissent was highly unusual — the first from a deputy governor for monetary policy since Bailey took the helm of the central bank in early 2020 — and exposed deep fractures over how to tackle a fresh resurgence in price pressures.

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If the split persists, Bailey’s vote alone will decide how quickly the BOE plows ahead with further easing.

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“The bar for faster cuts has risen on the back of this and heightened divisions within the MPC may also call into question just how far Bank Rate can go in the coming quarters,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Internal disagreements are now boiling over.”

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Deutsche Bank’s measure of voting division on the Monetary Policy Committee shows discord has soared in recent years, peaking in 2023 and remaining elevated as rates have fallen, particularly when compared to the harmony in the post-financial crisis era when rates were held at close to zero.

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Bloomberg Economics’ BOEspeak Index also shows a wedge emerging between Bailey and Lombardelli. Using Bloomberg News headlines, it shows Bailey’s recent remarks have been more dovish than the BOE average and notably more so than Pill and Lombardelli whose comments have been more neutral.

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Thursday’s meeting was the first ever that a second round of voting was needed to break the deadlock after no single course of action won a majority of MPC members. The vote split — economists had expected only two to oppose a reduction — saw the market odds of a cut in November drop below 50% as the once-a-quarter pace seen since last August was thrust into doubt. 

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The divide reflects disagreements over whether the current spike in inflation will derail the BOE’s progress in containing price pressures that first erupted after Russia’s invasion of Ukraine sent energy prices soaring. But it also reveals Bailey’s more relaxed approach to dissent.

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“As the MPC approaches the end of its easing cycle, you’d expect there to be disagreement amongst policymakers about where rates should settle,” said Dan Hanson, chief UK economist at Bloomberg Economics. “What’s unusual, at least when compared to the past decade or so, is there’s a split right at the heart of the committee — between the governor and the deputy governor for monetary policy. The key point for investors is that Bailey’s vote will likely tip the balance between a cut and hold.”