Is the MPC right to turn hawkish?

While it came as no surprise that the US Federal Reserve pressed ahead and raised interest rates last week, markets were given a jolt by an unexpected split on the UK Monetary Policy Committee, with one member voting for an immediate hike and others suggesting they may not be far off. Admittedly, with Kristin Forbes having previously suggested that she was not far away from the limits of her tolerance for an overshoot of the 2% inflation target, her non-consensus vote to raise Bank Rate by 25bp was not completely out of the blue. However, more surprising was that some other members “noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted”. Reflecting this, markets are now pricing in a rate hike around the end of next year, almost a year earlier than they thought after February’s Inflation Report.