London Daily

Focus on the big picture.
Thursday, Jul 23, 2026

Analysis: Bank of England split raises policy doubt at key moment for economy

Analysis: Bank of England split raises policy doubt at key moment for economy

The surprise split vote behind the Bank of England's interest rate hike last week, which was too small for almost half its officials, threatens to obscure the British central bank's intentions and potentially hurt the economy.

Some BoE watchers say emerging evidence of division among policymakers over how to respond to inflation could sow confusion about its reaction function - the way investors and the public can expect a central bank to respond to economic developments.

The BoE has already been accused of mixed messaging after wrong-footing investors who expected a rate hike in November, then raising borrowing costs in December.

"The on-and-off-again November interest rate hike was only a microcosm of that," said economists Robert Wood and Kamal Sharma from BofA Global Research.

"What we see as changes to reaction function leave us more concerned about the current inflation episode."

With the BoE warning that inflation could soon surpass 7% - almost four times its target - four of the nine Monetary Policy Committee (MPC) members voted on Feb. 2 to raise Bank Rate to 0.75%.

That would have represented the biggest one-off increase in borrowing costs since the BoE became operationally independent 25 years ago.

In the end, a slim majority of five, including Governor Andrew Bailey, voted for a 0.25 percentage point increase to 0.5% - still historically very low.

While the MPC agreed that further modest tightening of monetary policy was likely in the coming months, the difference between the two camps was about more than a few basis points.

Minutes from their meeting showed they had different approaches to bringing inflation back towards the BoE's 2% target.

Policymakers backing a 25 basis point increase worried that a bigger rise might provoke an "outsized" shift in Bank Rate expectations among investors, which already looked steep enough to push inflation well below target in three years' time.

From this group, Chief Economist Huw Pill said on Friday he was keen to avoid the impression the BoE was going "foot to the floor" in a rapid and steep cycle of policy tightening that risked hurting the economy unnecessarily.

The minority of four MPC members who wanted a bigger rate hike thought the BoE should aim to jolt expectations about higher inflation and cut out the risk that price pressures get embedded in pay deals and expectations for future inflation.

The BoE could probably squash inflation by raising Bank Rate a couple more times to 1% in May and running down its nearly 900 billion pound ($1.2 trillion) bond-buying programme, alongside "consistent, forceful communication", Wood and Sharma said.

But they warned that any lack of a clear message risked creating an economic downturn that could possibly have been avoided.

While the U.S. Federal Reserve looks set to raise rates in March, there seems less chance of similar differences emerging among its officials about how to tighten policy.

Even St. Louis Fed President James Bullard, a strident supporter of early and fast policy tightening, told Reuters last week it was not clear what starting off with a bigger, 50 basis point, hike would accomplish.

NO CLEAR MESSAGE?


While the BoE has sometimes faced accusations of groupthink during normal times, in past periods of economic upheaval its policymakers mostly stuck to the same script, helping businesses and households to plan ahead, Wood and Sharma noted.

Its current approach differs from the forward guidance policy of former governor Mark Carney, who tried to issue clear statements about the reaction function - although he too faced criticism that this made the BoE a hostage to fortune.

Most BoE officials did not speak publicly before last week's rates announcement and after the communication missteps of last year Bailey said he could imagine going back to the days of no guidance.

But some economists warn that without a consistent message at a critical juncture for expectations about the economic and policy outlook, the BoE risks losing control of the narrative, with real world consequences.

The market reaction to Thursday's decision may have been a taster of that scenario.

Investors ratcheted up their bets for future interest rate hikes, despite the signal from the BoE's inflation forecasts that it thought the market view of the rates outlook was already aggressive.

If the market goes too far in pricing rate hikes, and for too long, it would tighten financial conditions and hurt the ability of businesses and households to access finance.

"We think markets are currently pricing in too many hikes; something that could persist until the BoE clarifies its approach," said Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute.

"The MPC will need to communicate clearly what its motivation is, in our view, to avoid over-tightening financial conditions and hurting the real economy."

($1 = 0.7394 pounds)

Newsletter

Related Articles

0:00
0:00
Close
Northern Ireland Secures Additional Infrastructure Funding From UK Treasury
Wales Approves Port Investment Plans to Support Green Energy Supply Chains
UK Financial Regulator Simplifies Stock Market Rules to Attract More Listings
UK Reports Decline in Small Boat Crossings Across the English Channel
UK Government Creates Emergency Support Fund for Financially Pressured Universities
Scottish Government Launches Economic Strategy Focused on Innovation and Renewable Industries
UK Expands Sustainable Farming Incentives to Support Environmental Measures
UK Government Introduces New Neighbourhood Policing Standards Across England and Wales
UK Competition Regulator Opens Review of Artificial Intelligence Foundation Models
UK Deepens Indo-Pacific Security Cooperation After Talks With Singapore and Japan
UK Announces Rail Modernisation Plan for Northern England With New Infrastructure Funding
UK Government Updates Housing Planning Rules to Accelerate Residential Construction
UK Approves Major North Sea Offshore Wind Project to Support Clean Power Goals
UK Health Service Begins Major Digital Upgrade to Cut Hospital Waiting Times
Bank of England Holds Interest Rates Steady as UK Inflation Pressures Remain Persistent
UK Universities and Industry Expand Space and Defense Research Partnerships
House of Lords Approves Social Housing Bill Amendments on Shared Ownership Rights
House of Lords Advances Civil Aviation Bill With New Passenger Protection Measures
UK Government Suspends Tariffs on Fertilizer and Food Imports to Reduce Costs
Russell Group Universities Support New UK Business Department Focused on Innovation
UK Parliament Opens Inquiry Into Transport Barriers Facing Young Jobseekers
Home Builders Federation Calls for Lower Costs as New UK Government Sets Housing Priorities
Andy Burnham Meets UK Devolved Leaders to Strengthen Regional Cooperation
Andy Burnham Holds First International Calls With Trump, Macron, and Zelenskyy
Andy Burnham Reshuffles Cabinet With John Healey Appointed Chancellor of the Exchequer
Andy Burnham Government Removes VAT From Electricity Bills to Cut Household Costs
Andy Burnham Becomes United Kingdom Prime Minister After Sir Keir Starmer Resigns
Miliband Sets Climate and International Law at Centre of UK Diplomacy
US Gasoline Returns to $4 as Renewed Iran Fighting Disrupts Oil Flows
Czech Central Bank Governor Rejects Early Euro Entry and Rate-Cut Pressure
Trump Orders 50% Tariffs on Selected Canadian Imports
Pentagon Discloses Nearly 100 US Troop Injuries During Renewed Iran Fighting
Trump Readies New Tariffs as Temporary Global Levy Nears Expiry
US Judge Pauses Paramount Skydance and Warner Bros Discovery Merger Over Antitrust Concerns
NHS England Faces Growing Retention Pressure Among Younger Midwives
UK Data Centre Expansion Faces Water and Grid Capacity Challenges
UK Defence Shares Rise After John Healey Appointment and Continued Spending Commitments
OECD Urges UK Government to Review Pension Triple Lock to Protect Public Finances
Bank of England Keeps Cautious Approach as Energy Costs Threaten Inflation Progress
County Councils Call for Wider Devolution and Long-Term Social Care Funding Reform
IMF Urges UK Government to Maintain Fiscal Discipline as Growth Forecast Slows
Russian Warship Holds Live-Fire Exercises Near UK Coast as Royal Navy Monitors Activity
Mitie Agrees Three Point One Billion Pound Takeover by OCS in Another Blow to London Listings
JPMorgan Chase Warns Bank Levies Could Hit UK Growth and Drive Capital Away
UK Unemployment Holds at Four Point Nine Percent as Labour Market Shows Resilience
UK Government Borrowing Falls Below Forecasts as Treasury Receives Early Fiscal Boost
John Healey Cuts VAT on Household Electricity Bills After Cancelling National Digital ID Scheme
Andy Burnham Forms New Labour Government With Ten-Year National Renewal Plan
EU Imposes Record €550 Million Digital Services Fine on AliExpress
UK Publishes Updated Consumption-Based Carbon Emissions Data
×