Unanimous vote quells fears of early bank rate rise

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The Independent Online
FEARS OF an imminent hike in interest rates receded yesterday after it emerged that the Bank of England's Monetary Policy Committee (MPC) voted unanimously to keep them on hold at its last meeting.

The minutes of the 5 August meeting showed none of the nine-strong committee voted for a rise, confounding speculation of a split over rates.

The committee was, however, divided three ways on its outlook for inflation over the next two years, indicating that a stalemate would prevent any move in rates in the short term. The financial markets scaled back their expectation of a hike as economists said the minutes showed no rate rise was on the horizon until 2000.

The MPC decided the "best course" was to keep rates at 5 per cent, after discussing both a cut and a hike. A reduction was rejected as an "imprudent risk", while a rise was ruled out for being "premature and overly cautious".

There was "great uncertainty" about how long the economy would continue to improve before triggering inflation. "There was a difference of about 0.8 per cent between the highest and lowest inflation rates which individual members thought likely at the end of the two-year horizon," the minutes said.

At least two MPC members said underlying inflation, currently at 2.2 per cent, would undershoot the target of 2.5 per cent. One pointed to the high real borrowing costs, with lenders not passing on previous interest rate cuts and money market rates rising sharply. Other members - again at least two - pointed to rising house prices and signs of accelerating domestic demand.

A third group - again of at least two - counselled against a move. It said a cut could be "taken badly" by the financial markets and lead to a rise in long-term inflation expectations. It said a rise at a time when the economy was recovering with few inflationary pressures would send a signal that the MPC was more worried about an overshoot than an undershoot.

Separate figures showed retail sales grew 0.1 per cent in July, well below forecasts of 0.5 per cent and supporting the MPC's caution, economists said.

Nick Stamenkovic, senior bonds analyst at IDEAglobal.com, said: "The minutes, combined with the retail sales, reduce the chance of a rate hike this year. Short sterling has rallied and the market seems to be pushing out the time of the next rate hike until the first part of next year."

The MPC vote was welcomed by industry and trade unions. The British Chambers of Commerce said: "The vote may help to dispel some of the hysteria in the press for a rate rise by the end of the year."

Sir Ken Jackson, head of the AEEU union, said: "We are confident the MPC will continue to act in the best interests of manufacturers as they have done over the past few months."

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