Greece fears keep interest rates on hold - for now

The minutes of July’s Monetary Policy Committee meeting were released on Wednesday

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Fears of a Greek crisis papered over deepening splits at the Bank of England over when to raise rates, according to the minutes of July’s Monetary Policy Committee meeting, released on Wednesday.

A “number of members” on the nine-strong committee now believe inflation risks are rising, despite annual price growth of 0 per cent in June.

The MPC met two weeks ago against the backdrop of Greece’s referendum and extended bank closures, which left it on the brink of a eurozone exit.

“For these members, the uncertainty caused by recent developments in Greece was a very material factor in their decisions: absent that uncertainty, the decision between holding Bank Rate at its current level versus a small increase was becoming more finely balanced,” the minutes said.

"Greece caveats notwithstanding, we see these minutes as part of a gradual move towards policy tightening," said Philip Shaw of Investec.

But James Sproule, the chief economist of the Institute of Directors, said the Bank should hurry up and increase the cost of borrowing sooner rather than later. “The earlier the process of normalising rates starts, the smoother the course will be, and the longer the economy will have to adjust and prepare,” he said. “If rates do not begin to return to a more sustainable level soon, the Bank of England will be defenceless when the next crisis strikes, and unable to support the economy by shifts in monetary policy.”

Separately, the latest Household Finance Index from Markit for July found that 14 per cent of households expect higher interest rates before mid-October, up from 10 per cent previously. Around 80 per cent of households expect the Bank to put up rates within the next two years.

“Bank of England Governor Mark Carney recently suggested that the base rate may rise around the turn of the year. This, perhaps alongside greater inflationary pressures, has led households to take a more hawkish stance towards monetary policy expectations,” said Philip Leake of Markit.