Minutes Of MPC Meeting Suggest Base Rate Rise Approaching Soon

The Bank of England may have taken a step closer to raising the base rate from its record low level of 0.5 per cent.

Minutes of the June meeting of the Monetary Policy Committee noted that while the decision to hold the rate this month was unanimous - since there was no evidence yet of the inflationary effects of reduced slack in the economy taking hold - for some of the committee this decision was "more balanced" than before.

That suggests the MPC will move nearer to raising the base rate as the economy continues to grow, as the using up of surplus capacity is widely recognised by economists as a likely cause of increased inflation.

Another feature of the minutes was the statement that when the rate does start to rise, it will only do so gradually and is likely to remain below the levels it was at before the economic crisis. This will comes as good news for SMEs, as it means they will not see sudden hikes in their borrowing costs.

Following the publication of the minutes, analysts have revised their predictions of when the first rate increase might take place.

Shroders Asset Management noted that hints about a possible increase sooner rather than later have also been made by governor of the bank Mark Carney, who raised the prospect in his Mansion House speech earlier this month by reflecting that the economy had grown much faster than expected in the last year. For this reason, it was "surprising" nobody seemed to anticipate a rate hike before the end of 2014, the governor reflected.

Describing the statement as "more hawkish" in tone than Mr Carney's previous comments, European economist at Schroders Azad Zangana said: "It appears that the Bank of England is preparing markets for that first increase to take place before the general election. We are therefore bringing forward our forecast for the first increase to February 2015."

He added that the base rate is likely to rise to 1.5 per cent by the end of 2015.

Expert Opinion

The plans for the base rate will be watched closely by the entire business community, with small businesses particularly keeping an eye on what changes could mean for them. <br/> <br/>"However, while the low rates may have helped businesses to stay afloat in the recent difficult times, the flipside is that commentators believe that the low rates have had an impact on lending and general access to finance. <br/> <br/>"There is an important balance to be struck, so it will be interesting to see when an increase is made and what impact this goes on to have on many companies." Fergal Dowling - Partner