Belfast Telegraph

Interest rate hike fears rise amid bank 'dissenters'

By John-Paul Ford Rojas

Bank of England rate-setters have dampened expectations of a first hike not taking place until the end of next year after minutes of their latest meeting revealed increasing concern about the potential for rising inflation.

Members of the monetary policy committee (MPC) voted by a 7-2 majority to keep rates on hold at 0.5%, where they have remained for more than five years - the fourth month in a row in which the vote has been split.

But the minutes of the meeting earlier this month revealed that among the majority "there was a material spread of views on the balance of risks to the outlook".

The slightly more "hawkish" than expected tone - days after economists at HSBC suggested a rate hike could come as late as 2016 - helped the pound climb a cent against the US dollar.

Some of the members in the majority on the MPC were concerned that should interest rates follow expectations of a hike towards the end of 2015, there could be a risk of inflation breaching the bank's 2% target.

This was because they argued wasteful "spare capacity" holding back the economy - a key measure for policy makers - could be used up more quickly than expected, amid strong jobs growth.

Inflation is at a five-year low of 1.2% but the MPC must consider how it will change over the next few years. Others took the view that UK gross domestic product growth (GDP) might slow further than expected and inflation might remain below target for longer than expected, with a premature rise in rates leaving the economy "vulnerable to shocks".

The latter views appeared to be in line with last week's quarterly inflation report from the bank, which said inflation was likely to fall below 1% in coming months, as governor Mark Carney warned of the "spectre" of European stagnation.

MPC dissenters Martin Weale and Ian McCafferty continued to argue that rate-setters should "look through" temporary effects such as exchange rates and raw material prices which have pushed the latest inflation rate down - and backed a 0.25% hike now.

Belfast Telegraph