The Bank of England dropped a heavy hint yesterday that the next movement in interest rates will be upwards as fresh figures showed that unemployment has dropped to a 28-year low.
The latest minutes of the Monetary Policy Committee show that although it voted unanimously to keep rates on hold at 3.5 per cent at its meeting a fortnight ago, some members had contemplated an increase because of soaring household debt levels fuelled by rising house prices.
"Concerns about the longer-term sustainability of the current pace of consumption growth and household debt accumulation ... suggested to some members that an increase in interest rates might soon become necessary," the minutes said. The minutes warned that the longer consumers continued to spend based on over-optimistic expectations of income growth and interest rates, the greater was the risk of a sharp fall in consumption, making it more difficult for the Bank to meet its inflation target.
The MPC also noted that while July's surprise quarter-point cut in rates had been a "precautionary" move in response to a slowdown in external demand and fears of more sluggish domestic growth, those risks had eased and the need to stimulate the economy through lower rates was "no longer clear" to some members.
The pound rose against both the dollar and the euro and government bond prices tumbled as currency markets factored in the likelihood of an interest rate rise. "The market has clearly put a lot of weight on the suggestion by some MPC members that they were close to voting for an increase," Alan Castle, UK economist at Lehman Brothers, said. "We are now significantly more concerned about the possibility of a near-term rate hike."
The prospect of an increase in borrowing costs was fuelled by figures showing a bigger-than-expected fall in the jobless total in July and an increase in employment to a record high. The Office for National Statistics said that the number of people out of work and claiming benefit fell by 6,900 to 930,800 - the lowest level since September, 1975. Employment, meanwhile, rose by 63,000 to a new record of 27.93 million. The increase in average earnings also rose from 3.1 per cent to 3.4 per cent - still within the Bank's "comfort zone" of 4.5 per cent.
John Butler of HSBC said the MPC's rhetoric was "more hawkish than expected" given that it actually voted 9-0 to keep rates on hold. However, he said that if the strong labour market persisted then "the rhetoric is likely to turn into action".
Philip Shaw of Investec said that although the Bank was likely to raise rates before either the US Federal Bank or the European Central Bank, an increase before the end of the year looked unlikely.