Bank's rate decision disregarded pound's strength

The Bank of England in effect gave the green light to a further surge in the pound, saying sterling's appreciation should be "disregarded" as a barrier to increases in interest rates.

The minutes of the meeting of the Bank's Monetary Policy Committee on 4 and 5 February showed its gave unanimous approval to the decision to raise base rates to 4 per cent.

The news helped propel the pound to a fresh 11-year high against the dollar, topping $1.91 to reach a peak of $1.9140, its highest since September 1992. It later dropped back to $1.889. "Sterling appears to have the blessing of policymakers to appreciate further," Michael Hume, an economist at Lehman Brothers, said.

Echoing last week's quarterly Inflation Report, the MPC said inflation was forecast to hit its 2 per cent target in two years' time, economic growth was strengthening and the risks were no longer weighted to the downside. But analysts focused on the comments on the exchange rate, which has surged almost 20 per cent against the dollar over the past 12 months.

The committee said a stronger pound would reduce inflationary pressure but added: "In the view of some members it could be argued that it was appropriate to look through the first-round impact of the rise in sterling, treating it as a one-off downward shock to the price level which should be disregarded in setting rates.

"It should be treated as an offset to domestic inflationary pressure only if it affected subsequent wage and price setting behaviour."

It added that the pound's rise might only be temporary and revealed that a fear of a sudden fall in the pound - removing the brakes on inflationary pressure - dissuaded it from keeping rates on hold. None of those who raised arguments against a rise cited the exchange rate as a reason for holding off. Instead, they argued that low inflation, a lack of rises in wage costs and the risk that the economy's supply capacity might be larger than thought could be enough to justify holding off a rate rise.

Mr Hume said the comments were "surprising" and doubted they represented the majority. "The danger is that markets see this as a carte blanche to push sterling higher, thereby hindering the process of rebalancing the economy," he said.

Others questioned why the pound's fall last year had been cited as a reason to raise rates in November. "It seems a bit strange the rule does not apply the other way round," Jonathan Loynes, the chief UK economist at Capital Economics, said.

Rachel Lomax, a deputy governor, defended the MPC against accusations it was trying to deflate a house price bubble rather than focusing on inflation. She told an audience at the University of the West of England last night: "House prices and borrowing are part of the wide range of evidence we review monthly in asessing the outlook for inflation. They do not have a special role in driving interest rate decisions."