London Daily

Focus on the big picture.
Wednesday, Jul 08, 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
Federal Financial Framework Shifts as Treasury Launches Universal Savings Program for Minors
French Court Allows Le Pen to Run for Presidency, but with an Electronic Tag: "I Will Appeal, and I Will Run"
$1.4 Trillion: The Lawsuit That Could Crush Meta
Europe's Growing Struggle with Extreme Heat and Air Conditioning
UK Daily Briefing: Legal Developments and Social Issues
Political Turmoil and Rising Costs
Anthropic Reengineers Agentic Architecture to Shift Autonomous Workplace Automation to the Cloud
Logic Flaw in Windows 11 Permission Architecture Silently Consumes Hundreds of Gigabytes of Local Storage
Apple Advances Late-Stage Operating Systems with Fourth Beta Deployments
Global Crisis Alert: Escalating Middle East Tensions and UK Political Upheaval
UK Parliament Pushes for Greater Domestic Control Over Critical Technologies
UK Parliament Warns Trade Fair and Exhibition Industry Is Losing Global Competitiveness
Police Launch Murder Investigation After Mother and Two Children Found Dead Near Bedford
British Chambers of Commerce Survey Shows Business Confidence Falls to Post-Pandemic Low
UK Parliament Report Warns Britain Risks Falling Behind in Artificial Intelligence Sovereignty
Office for Budget Responsibility Warns United Kingdom Faces Long-Term Fiscal Pressures
Nigel Farage Resigns as Member of Parliament Amid Financial Scrutiny and Triggers By-Election
Deep Purple Has Released Its Best Album in Decades
UK MPs Criticise Student Loan System as Potentially Mis-Sold to Millions of Borrowers
Policy Groups Propose Bank of England-Backed Solar Loan Scheme for Millions of Homes
UK Health Agency Issues Amber Heat Alerts Across Six Regions as Temperatures Rise
Royal Air Force F-35 Jets Conduct First High North Air Policing Missions From Aircraft Carrier
Major UK Companies Join Government Cybersecurity Pledge Amid Rising Digital Threats
UK Sanctions Russian Operatives Linked to Chemical Weapons Programmes and Poisoning Cases
UK Government Expands Free Breakfast Clubs and Limits School Uniform Costs
UK Water Companies Face Tougher Penalties Under New Environmental Enforcement Rules
UK Universities Warn Funding Cuts Could Damage Skills Pipeline and Economic Growth
NHS Expands Artificial Intelligence Tools to Help Reduce Patient Waiting Lists
NHS Ombudsman Criticises Failures in End-of-Life Communication and Patient Care
NHS Launches Nationwide Vaccination Drive After Rise in Measles Cases
UK Government Introduces New Limits on Foreign-Linked Political Donations
Thames Water Creditors Advance £10 Billion Rescue Plan to Prevent Potential Public Ownership
Andy Burnham Prepares Labour Leadership Platform as Party Faces Post-Starmer Transition
UK Met Office Issues Heatwave Alerts for London and Southern England
Keir Starmer Blocks Earlier World Cup Kick-Off Time for England Match Against Mexico
NHS Digital Transformation and Media Consolidation Highlight UK Policy Priorities
UK Government Pushes Digital Trade Rules to Cut Export Costs for Businesses
Bank of England Plans Leverage Rule Changes to Support Government Bond Market
UK Police Operation Targets Organised Immigration Crime Networks With Hundreds of Arrests
Yvette Cooper Calls for Global AI Rules to Prevent Security Risks
NHS Begins Major AI Expansion Through £10 Billion Digital Investment Programme
UK Government Tightens Rules on Political Donations to Limit Foreign Influence
Keir Starmer Defends UK Defence Spending Plan at NATO Summit in Turkey
Comcast’s Sky Agrees £1.6 Billion Deal to Acquire ITV Media and Entertainment Division
Senior NHS Doctors Vote in Favour of Renewed Strike Action Over Pay Dispute
Andy Burnham Set to Succeed Keir Starmer as Labour Leadership Nominations Open
Microsoft Lays Off 4,800 Employees and Xbox Suffers the Hardest Blow
Office for National Statistics Updates Historical Investment Data Review to Improve Accuracy
Department for Science, Innovation and Technology Highlights Economic Gains From Digital Inclusion
Debate Intensifies Over UK Defence Strategy and Domestic Security Priorities
×