London Daily

Focus on the big picture.
Wednesday, Jun 10, 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
United Kingdom Sees Recovery in Horizon Europe Research Funding Share to 9.3 Percent
UK Inflation Holds at 2.8 Percent as Office for Budget Responsibility Flags Persistent Price Pressures
United Kingdom Launches National Anti-Fraud Framework to Combat Rising Pension Scam Losses
United Kingdom Expands Sanctions on Israeli Groups While Funding Palestinian Authority Salaries and Gaza Mine Clearance
United Kingdom Issues Three-Month Ultimatum to Major Technology Firms Over Child Online Safety Controls
United Kingdom Government Moves Toward Blanket Social Media Ban for Children Under Sixteen
Widespread Anti-Immigration Rioting Erupts Across Belfast After Knife Attack Linked to Asylum Seeker
Farmers Warn of Crop Losses Following Months of Unseasonal Rainfall
Civil Aviation Authority Launches Review of Regional Airport Operations
Met Office Issues Heat-Health Alert Across Parts of England
National Grid Introduces New Measures to Protect Winter Energy Supply
Northern England Rail Upgrades Receive Additional Government Funding
Wales Advances Green Hydrogen Strategy to Decarbonize Heavy Industry
UK Expands Recruitment Incentives to Address Shortage of STEM Teachers
High Court Opens Door to Climate Liability Claims Against Major Industrial Emitters
Police Service of Northern Ireland Investigates Major Personnel Data Breach
Defense Ministry Overhauls Procurement System to Accelerate AUKUS Submarine Program
Net Migration Remains Above Government Expectations, New Data Shows
UK and Scottish Governments Agree Framework for Expanded North Sea Wind Development
UK Treasury Launches New Tax Incentives to Boost AI and Semiconductor Investment
Bank of England Signals Continued Caution on Interest Rate Cuts
UK Unveils £10 Billion NHS Digital Modernization Plan Centered on AI Integration
Nebius Opens Major Robotics and Physical AI Laboratory in London
Bank of England Data Shows Strong Rise in New Mortgage Approvals
Network Rail Completes Landmark Upgrade of Severn Tunnel Rail Infrastructure
East West Rail Passenger Services Between Oxford and Milton Keynes Set for December Launch
GlaxoSmithKline Reportedly Pursues £7 Billion Acquisition of US Cancer Drug Developer Nuvalent
Bank of England Signals Interest Rates Likely to Remain Unchanged Despite Energy Market Risks
NHS Trusts Launch Job-Cutting Programmes as Financial Pressures Intensify Across England
More Than 130 Labour MPs Urge Ban on Trade With Israeli Settlements
Keir Starmer Orders Technology Firms to Introduce Smartphone Nudity Controls for Under-18s
UK Unveils £400 Million National AI Supercomputer Fund and New Economics Institute
Japanese Technology Firm Fujitsu Launches Advanced Artificial Intelligence Tool for Corporate Disclosures
South Africa Officially Launches Nationwide Campaign for Highly Contested Local Government Elections
United Kingdom Commits Additional Funding for Unexploded Ordnance Clearance in Laos
Singapore Announces Stringent New Greenhouse Gas Regulations for Commercial Cooling Systems
Cambodia and Thailand Hold High-Level Border Security Talks at United Nations Headquarters
Myanmar Military Government and China Sign Major Agreement to Upgrade Media and Cultural Cooperation
Knife Attack at Swiss Train Station Leaves Three Injured in Suspected Act of Domestic Terrorism
Transnational Extortion Gang Threatens Canadian Police With Army of One Thousand Armed Operatives
Australia Imposes Forty-Two-Day Quarantine on Cruise Ship Passengers Following Deadly Hantavirus Outbreak
International Monetary Fund Unlocks Seven Hundred Million United States Dollars for Sri Lanka Following Economic Reforms
Australia Launches Record One Point Four Billion Dollar Lawsuit Against Chemical Giant 3M Over Contamination
China and Canada Foreign Ministers Meet in Ottawa in Effort to Stabilize Strained Diplomatic Ties
Indonesia Demands Urgent United Nations Security Council Reform Amid Escalating Global Conflicts
Extreme Weather Patterns Trigger Severe Drought in Madagascar and Destructive Flooding in East Africa
Indian State of Karnataka Faces Political Upheaval as Chief Minister Siddaramaiah Abruptly Resigns
Philippines and Japan Reaffirm Defense Ties as Crucial for Indo-Pacific Regional Stability
Norway Joins French Nuclear Deterrence Initiative in Major Shift for European Security Architecture
Global Critical Mineral Alliances Expand as Western Nations Move to Counter Chinese Supply Dominance
×