Some MPC members "nearer rate rise"

Thursday 22 May 2014

Some officials on the Bank of England's interest rate setting committee are moving closer to voting for a first rise since 2007, minutes of its latest meeting suggest.

Members had a "variety of views" on policy, with some believing that the decision was becoming "more balanced" after five years of Bank rate being on hold at 0.5%.

Some were more concerned than others about the risks of a housing bubble created by continued low borrowing costs. The publication of the minutes of the meeting of the nine-member Monetary Policy Committee (MPC) earlier this month sent the pound higher to almost 1.69 US dollars, closing in on a recent near four-year high.

They disclosed that members voted unanimously to leave the Bank rate on hold at 0.5% for the time being and also all agreed to leave the Bank's quantitative easing scheme pumping money into the economy unchanged at £375 billion. Policy makers have indicated that when the rate does rise it will come up gradually and only to a level well below historical averages.

The minutes recognised that "such a path for policy ran a greater risk of a build up of financial imbalances, particularly in the housing market" but reiterated that the Bank had other tools to address this other than the "last line of defence" of rates. There was also an argument that if the cost of borrowing is to come up only gradually, it should be raised earlier, though others said this risked hitting growth.

"Committee members placed different weights on these considerations and this was reflected in a variety of views on the appropriate path of monetary policy," the minutes said. "The committee would continue to refine its views as the economy evolved, and for some members the monetary policy decision was becoming more balanced."

The document also said the Bank expects UK gross domestic product (GDP) to grow by 0.9% in the second quarter of the year.

Interest rates were last increased in the summer of 2007. They were slashed to 0.5% at the height of the downturn in March 2009 as policy makers aimed to help nurse the economy back to health, and have remained there ever since.

The accelerating recovery has prompted markets to bring forward expectations of when they will go up. This is currently pencilled in for spring next year but more recent improvements have led some experts to predict a hike as early as this year.

Last week, Bank governor Mark Carney tried to dampen expectations of an early increase by warning that despite strong growth the "prize" of sustained economic improvement was yet to be achieved. The latest minutes of the MPC revealed that all members agreed there must be more evidence of "slack" or spare capacity in the economy reducing "before an increase in Bank rate would be warranted".

However there was "considerable uncertainty" and a "range of views on the committee" around the central estimate that this key measure was currently in the region of 1%-1.5%.

Howard Archer, of IHS Global Insight, said "hawkish" members of the committee - who would be inclined to raise rates sooner - were apparently "starting to get twitchy", leaving the outlook for policy uncertain. The minutes showed "that opinions within the committee are diverging on about exactly when monetary policy should start to be gradually tightened", he said.

Experts at Capital Economics said: "It may not be long before one or two members start to vote to raise interest rates."