At its latest policy decision, the Bank of England maintained interest rates at 0.25% and the decision was in line with consensus forecasts.
There were also no changes to the bond-buying programme.
There was, however, a 5-3 vote for the decision compared with expectations of a 7-1 decision. Forbes, who had dissented at the previous two meetings, again voted for a rate increase while Saunders and McCafferty also voted for an immediate 0.25% increase in rates.
The switch by Saunders is potentially very significant given that he is not excessively hawkish and suggests a majority is edging towards pushing for a rate increase.
In the policy summary, there were comments that the continued growth of employment could indicate that spare capacity in the economy is being eroded, lessening the trade-off that the MPC needs to balance and reducing the MPC’s tolerance of above-target inflation.
The MPC also noted that Sterling had been subjected to renewed selling which will put fresh upward pressure on import prices, but average earnings growth remained subdued. Indeed, the MPC noted that it was striking that recent wage growth remained notably weak compared with historic norms.
Overall, inflation is expected to overshoot the target by a larger margin than expected previously and to remain above target throughout the 3-year period.
Looking ahead, the evolution of inflationary pressures, consumer spending and strength of other growth components would be the key consideration in judging policy.
All members agreed that any increase in interest rates was expected to be gradual and limited in nature.
Overall, if the inflation projections do not decline by the time of the August policy meeting and inflation report, there is a high probability that the MPC will decide to reverse the cut in interest rates sanctioned last year.
Sterling moved sharply higher following the decision with GBP/USD rallying to the 1.2780 area from 1.2695 as the market took direction from the vote split. EUR/GBP also declined sharply to the 0.8740 area.
Gilts extended losses after the data with a decline of over 90 ticks on the day while equities extended losses.