The Bank of England yesterday put homeowners and business on notice that it plans to raise interest rates again "at some point". In an unusually explicit statement of its policy stance, it indicated the question on rate rises was "when" rather than "if".
Sir Andrew Large, a member of the Bank's Monetary Policy Committee, voted to raise rates at the meeting two weeks ago but was outvoted on the nine-strong committee.
The majority, led by Mervyn King, the Governor, said: "If the economy continued to evolve in line with the committee's central projections, a further increase in the repo rate would be warranted at some point."
They said the news since the November rate rise had not materially affected the outlook while time was needed to analyse the impact of the pre-Budget report and revisions to economic data.
Additionally they wanted more time to gauge the reaction of highly indebted households to the rise in borrowing costs. "The news was not yet sufficient to justify another increase," they said.
Sir Andrew, the Bank's deputy governor with responsibility for financial stability, put particular weight on the vulnerabilities caused by the continued rise of household debt.
Last week he published the Bank's Financial Stability Review, warning that a sudden drop in house prices and slump in consumer spending posed a threat to financial stability. He said the latest news had been "almost uniformly in an upside direction". He told his colleagues the Bank could not afford to wait for further evidence, especially as January's decision would be complicated by the launch of the new CPI inflation measure and target.
The pound, which had fallen following Tuesday's unexpected drop in inflation, rebounded by more than a cent against the dollar to break through $1.76.
The euro rose above $1.24 against the dollar for the first time since its launch as a live currency in 1999.
The hawkish tone of the meeting's minutes confirmed analysts' forecasts of further rate rises in 2004 but they remained divided over when the first increase would come.
Speculation that the first rise might come early in the new year was boosted by separate figures showing that unemployment fell last month.
A poll by Reuters found that economists in the City believe the Bank will raise rates by a quarter-point to 4 per cent by the end of March.
Most said the introduction of the new CPI inflation measure and the switch of the target to 2 from 2.5 per cent under the old system would prevent a rate increase next month.
"With only one member looking for a hike in December and the complication of the switch to the CPI target, rates are unlikely to go up in January," said Geoffrey Dicks, the chief economist at Royal Bank of Scotland, who opted for a February increase.
The Bank yesterday denied it planned to hold "road shows" to explain the inflation switch to the public - something that could have been a sign it was happy to delay rate rises until the message had got through.
The minutes warned there could be further sharp movements in the dollar. "So far, sterling has been largely unaffected by the revaluation of the euro relative to the dollar," they read. The MPC said retail sales and house prices were slowing and its regional agents had picked up anecdotal evidence retailers were disappointed by their November sales.
Nick Stamenkovic, an economist at RIA bond brokers, said official retail sales figures today could confirm a weak month on the high street, following Tuesday's figures showing prices rises on clothes were the smallest for a decade.
"A hike in January seems off the agenda and while the markets are anticipating a move in February the data suggest they could wait even longer," he said.
"The consumer is living on borrowed time and is unlikely to be the powerhouse; investment is in the doldrums so it is difficult to see where the impetus for strong growth is going to come from."Reuse content