Rates on agenda for Bank sages

Thursday 04 September 2014

Household jitters over an imminent first hike in interest rates since early 2009 will be tested when Bank of England policy makers meet today.

It will be their first vote since two members of the Bank's Monetary Policy Committee (MPC) argued for a hike in the rate from 0.5% to 0.75% but were outvoted by seven others including governor Mark Carney.

Economists expect rates to remain on hold today, with February or even this November being seen as the most likely dates for a first hike. This is in sharp contrast to the eurozone, where the European Central Bank is today expected to announce further measures to prevent the region's moribund economy from slumping into depression.

In the UK, policy makers are considering a hike in order to rein in possible inflationary worries further down the track. However there are fears that raising rates too soon could hamper growth, with sectors such as manufacturing and construction still below pre-recession level. A rate rise would also put pressure on household finances with a 0.25% hike likely to translate to an annual increase of £250 on a typical mortgage.

The likelihood of a hike before the end of the year had appeared to ebb in recent weeks as figures showed inflation dropped to 1.6% in July, while a 0.2% fall in pay - the first decline since 2009 - emphasised the pressure still facing households. At the same time, the Bank of England said it would take greater account of pay when deciding on when to raise rates.

There have also been suggestions of a cooling off in the housing market boom. But minutes of August's MPC meeting showing the split vote caused some to believe the possibility of a rate rise in 2014 was still open. This has been fuelled by strong monthly figures from the services and construction sectors this week, although this was offset by a disappointing performance in manufacturing.

The two dissenters, Ian McCafferty and Martin Weale, argued that despite weak pay growth, the Bank's actions ought to anticipate its inevitable rise, adding that a rate of 0.75% would still be "extremely supportive" to the economy. They suggested a small rise now would help the MPC stick to its aim of making only gradual hikes later, the minutes revealed. But the majority felt that "there remained insufficient evidence of inflationary pressures" to justify an increase.

Investec economist Philip Shaw said he expected a hike in November, arguing that a rise was on its way and history suggested this was unlikely to come too close to the general election in May.

He said: "There is typically a preference, if possible, to avoid monetary policy becoming a political football in an election campaign."

But Samuel Tombs, of Capital Economics, said: "We doubt that new dissenters Martin Weale or Ian McCafferty will manage to persuade any of the other seven MPC members to vote to raise interest rates at September's meeting. The recent weakness of wage growth and inflation, as well as signs that the housing market recovery is fading, have in fact strengthened the case for leaving rates on hold for a few more months. While the possibility of a rate hike before the end of this year can still not be ruled out entirely, the likelihood of such a hike seems to have declined."