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Interest rates expected to hold

Interest rates are expected to remain on hold next week when policy makers meet for the first time since divisions appeared in their views about when to raise them.

Two members of the Bank of England's Monetary Policy Committee (MPC) argued for a hike in the rate from 0.5% to 0.75% in August but were outvoted by seven others including governor Mark Carney.

It was the first split vote on rates since July 2011.

A first rise in Bank rate, which has remained on hold since the height of recession in 2009, is thought to be edging closer with February next year pencilled in as the most likely date but some analysts expecting it to come as soon as November.

The UK recovery from the economic downturn has increased the pressure on policy makers to consider a hike to rein in possible inflationary worries further down the track.

They must weigh up the need to keep inflation under control at around its 2% target against the fear that an interest rate rise could hamper growth, with sectors such as manufacturing and construction still below pre-recession level.

A rate rise would also put pressure on household finances with a 0.25% hike likely to translate to an annual increase of £250 on a typical mortgage.

The likelihood of a hike before the end of the year had appeared to ebb in recent weeks as figures showed inflation dropped to 1.6% in July, while a 0.2% fall in pay - the first decline since 2009 - emphasised the pressure still facing households.

At the same time, the Bank of England said it would take greater account of pay when deciding on when to raise rates.

There have also been suggestions of a cooling off in the housing market boom.

But minutes of August's MPC meeting showing the split vote caused some to believe the possibility of a rate rise in 2014 was still open.

The two dissenters, Ian McCafferty and Martin Weale, argued that despite weak pay growth, the Bank's actions ought to anticipate its inevitable rise, adding that a rate of 0.75% would still be "extremely supportive" to the economy.

They suggested a small rise now would help the MPC stick to its aim of making only gradual hikes later, the minutes revealed.

But the majority felt that "there remained insufficient evidence of inflationary pressures" to justify an increase.

Investec economist Philip Shaw said he expected a hike in November, arguing that a rise was on its way and history suggested this was unlikely to come too close to the general election in May.

He said: "There is typically a preference, if possible, to avoid monetary policy becoming a political football in an election campaign."

But Samuel Tombs, of Capital Economics, said: "We doubt that new dissenters Martin Weale or Ian McCafferty will manage to persuade any of the other seven MPC members to vote to raise interest rates at September's meeting.

"The recent weakness of wage growth and inflation, as well as signs that the housing market recovery is fading, have in fact strengthened the case for leaving rates on hold for a few more months.

"While the possibility of a rate hike before the end of this year can still not be ruled out entirely, the likelihood of such a hike seems to have declined."


From Belfast Telegraph