MPC split on rate rise

19.07.2007

The Bank of England's monetary policy committee (MPC) was again split on whether interest rates should rise when it met earlier this month.

At the July meeting the MPC voted six to three for a rate rise, following a split decision (five to four) in June for a rate freeze.

Minutes from the meeting reveal that the outlook for inflation in the medium term is for a rise, with the main risks being the impact of stronger demand growth on companies' prices, the evolution of inflation expectations, energy and import prices, and spare capacity in the economy.

For the majority of the MPC, including Bank of England governor Mervyn King, there was a strong case for the rate rise - with factors including import price pressures, high domestic services inflation and strong money and credit growth outweigh fears of downside risk.

Commenting on the minutes, Howard Archer, chief UK and European economist at Global Insight, said: "The minutes suggest to us that there is no great desire within the MPC to quickly follow up July's rate hike with another one, but interest rates are still likely to rise to six per cent in the fourth quarter unless there is clear evidence that the 125 basis points rise in interest rates enacted so far is increasingly feeding through to dampen economic activity and contain underlying inflationary pressures.

"There is clearly some concern within the MPC that raising interest rates again in the near term at least could have an excessive dampening impact on the economy given increased debt levels and the fact that the past interest rate hikes are still feeding through to affect activity."

He went on to predict an October interest rate rise to six per cent that would be the peak in rates as falls in inflationary pressures are expected to come from slowing consumer spending and growth.

Inflation data from the Office for National Statistics has also prompted suggestions that an interest rate rise to six per cent could be necessary.

The Consumer Price Index fell by 0.1 per cent to 2.4 per cent in June. However, core inflation - which excludes volatile food and fuel prices - rose to two per cent and the retail price index increased 0.1 per cent to 4.2 per cent, bolstered by higher mortgage repayments.

Simon Wallace, economist at the Centre for Economic and Business Research, said: "The Bank will be well aware that there remains significant upside threats to inflation.

"Consumer prices have grown resiliently throughout the first half of 2007 with the recent falls in the annualised index mainly due to rapid price rises in Q2 2006. There also remains the threat that the recent jump in oil prices past the $78-a-barrel level will feed through to increased energy and transportation costs in the second half of 2007.

"The rise in the Retail Price Index and the slightly higher than expected monthly consumer price inflation is likely to slightly boost expectations that the Bank of England will have to raise interest rates at least once more this year."

He went on to predict a November interest rate rise.