INTEREST RATES: Bank of England signals rate rise at start of the millennium
Monetary policy committee hawks are gaining strength on both sides of the Atlantic
Thursday 23 December 1999
The minutes of the latest meeting of the Bank of England's rate-setting committee showed three of the nine members voted for a 0.25 per cent hike. They were out-voted by six colleagues who recommended keeping rates on hold at 5.5 per cent. The size of the minority took the City by surprise.
But the minutes showed a further group - as many as five out of the six who advised no change to rates - warned that a further tightening would be needed "at some stage". This leaves only a small group arguing that economic growth was slowing.
The hawkish comments will fuel speculation that the MPC will raise rates in the New Year, possibly at their first scheduled meeting on 12 and 13 January. The fears were compounded by official figures yesterday pointing to a strong recovery in the export sector and increasing signs that consumers were dipping into savings to fund a spending spree.
The minutes showed that Mervyn King, the Deputy Governor of the Bank, and its chief economist John Vickers, voted for a hike, joined by "independent" member Willem Buiter. They argued that rising world demand, signs of further expansion on the domestic front and the risk to inflation in two years' time meant rates should be hiked now.
The minutes read: "In the view of some members, the risks of making a big monetary policy mistake were greater on the upside. The case for raising rates this month ... was not a matter of urgency, but on balance the evidence pointed to the need for a further rise."
The second group agreed there were signs that the economy was accelerating but said they needed hard evidence on factors such as the labour market in the New Year. "The risk of waiting another month or two would be unlikely to give rise to a big policy mistake given the saucer-shaped projection for inflation," the minutes said.
The last group, which experts said probably numbered only the known "dove", DeAnne Julius, argued the latest data pointed to a slowdown in the rate of domestic demand and output. "A rise in rates now would risk pushing inflation further below target," the minutes said.
Economists said the minutes clearly pointed to an imminent rate rise. Ian Stewart of Merrill Lynch said: "This will certainly increase the perception that the MPC will tighten, I think very probably in January."
Separate figures showed economic growth in the third quarter had been revised down to 0.8 per cent from 0.9 per cent. But a series of revisions back to the start of 1998 meant year-on-year growth was revised up to 1.9 per cent. The detailed figures showed exports of goods rose by 8.1 per cent, the highest since the second quarter of 1979 - the last months before the end of the last Labour government.
The surge, combined with a downward revision in household expenditure to 3.5 per cent from 4.3 per cent, provided further evidence that the UK economy was rebalancing.
But the GDP figures showed the household savings ratio fell sharply from 7.0 per cent to 4.5 per cent, its lowest since 1989. The decline reflected a drop in consumers' divided receipts and suggests households are digging into savings to finance spending. The Office for National Statistics said households sold pounds 10bn of shares in the last quarter bringing the total disposals over the past 18 months to some pounds 50bn.
Economist Dharshini David of HSBC said: "Overall, the numbers confirm the generally robust activity picture in the UK and, coupled with the MPC minutes, support expectations of a further tightening ... in the New Year."
The pound was largely unmoved on the currency markets. "There is no appetite to trade sterling at this side of Y2K," said Divyang Shah, global strategist at IDEAglobal.com.
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