Belfast Telegraph

Members out-voted as bank keeps interest rates at 0.5%

By John-Paul Ford Rojas

Two members of the Bank of England's monetary policy committee (MPC) voted for a 0.25% hike in interest rates in the first split vote on rates since July 2011, it has been disclosed.

Minutes of the MPC's meeting earlier this month showed that Ian McCafferty and Martin Weale dissented from the majority view of seven other members, including governor Mark Carney, that rates should be kept on hold.

The bank rate has remained at 0.5% since 2009 when it was slashed to try to help nurse the economy back to health, with the UK's economic recovery fuelling speculation about when it will start to rise again.

Rate-setters must weigh up the need to keep a lid on inflation with the risk that higher rates could derail the upturn.

Details of the latest discussions published by the bank yesterday revealed that most still felt that "there remained insufficient evidence of inflationary pressures" to justify a hike.

But the minutes added: "For two members, in particular, economic circumstances were sufficient to justify an immediate rise in bank rate."

The pound climbed a cent against the euro and was also up against the US dollar.

Markets have pencilled in the first rate rise for February 2015.

Details of the minutes were disclosed a day after figures showing a sharp fall in inflation to 1.6% appeared to end any prospects of rates being lifted this year.

These had already been dampened last week by figures showing wages falling 0.2%, and the Bank's Inflation Report putting extra emphasis the importance of the pay data when considering the path of rates.

Bank forecasts suggest inflation will remain close to but a little below 2% for the next couple of years.

It expects the UK economy to grow by 3.5% this year but the minutes said expansion "was likely to ease a little as the boost from pent-up demand released by the easing in credit conditions and lifting of uncertainty faded".

This would slow the pace at which "slack" or wasteful spare capacity is being eroded.

Slack is the key measure that policy makers want to see reduced before any rate hike and last week the bank said it was estimated to have fallen from 1.25% to 1%.

But it has said the weakness of wages suggest this capacity gap might have been greater than previously thought.

Reasons given for poor performance of pay include a larger labour supply as people work longer, partly because of concerns about pensions and debt levels, as well as employees concerns about their positions.

The minutes said: "Given the risk that an increase in labour supply or persistent concerns over job security would result in weak growth continuing for longer, there would be merit in waiting to see firmer evidence that solid increase in pay growth were in prospect before tightening policy."

This was one of the arguments of the majority on the committee who wanted to leave rates on hold.

These also cited headwinds facing the economy including weak eurozone growth, and the risk that a premature rates hike "might leave the economy vulnerable to shocks".

Belfast Telegraph