February 23, 2005
Mark Tran
UK Guardian
The prospects of a rise in interest rates strengthened today as Bank of England minutes disclosed that a policy maker voted to raise borrowing costs earlier this month.
Paul Tucker broke ranks with the rest of his colleagues at the Bank by voting for a 0.25 percentage point rise to 5%. The 8-1 vote came as a surprise to analysts, who had expected another unanimous vote. The Bank's Monetary Policy Committee (MPC) has voted unanimously since May 2004.
In its meeting of February 9 and 10, the MPC voted to hold rates for the sixth month running. But the tone of the minutes pointed to renewed concern about inflationary pressures.
Analysts said today's minutes suggested the MPC's next move would be to raise rates.
"The overall tone of the MPC minutes and the fact that one member has already shifted to voting for an interest rate hike reinforce our long-held belief that the next move in interest rates will be up," said Howard Archer, chief UK economist with the consultancy Global Insight.
The MPC noted that a change in interest rates at the February meeting would have surprised market participants, but Mr Tucker argued that such a move at the next meeting would make sense in the context of the latest inflation report forecasts, published last week.
The MPC outlined two key risks of a rate rise, its members differing "in the weight they attached to each and in the amount of additional evidence that they would need to justify a move".
The first key risk was to household spending in the near-term, following some recent data which had been surprisingly weak. "But it was always very difficult to interpret evidence from the Christmas period," the minutes said.
The second risk was that it was unclear how rapidly consumer prices would respond to demand and cost pressures. Inflation had picked up since the summer but it was still in the range that it had been in for some years.
Inflation remained at 1.6% in January, well below the Bank's 2% target. But in its inflation report, the Bank said inflation would rise above target in two years' time.
The Bank will also have noted other signs of strength in the economy. GDP growth in the fourth quarter of 2004 is likely to be revised up to an above-trend 0.8%, while the economy appears to have started off 2005 relatively well.
Latest data suggest the housing market could be stabilising and confirm that the manufacturing sector has not been as weak as previously reported. Meanwhile, underlying inflationary pressures continue from rising earnings growth amid a tight labour market and high producer price inflation.
Yesterday, Kate Barker, a "dovish" member of the MPC, said only uncertainty about consumer spending stopped the Bank raising rates this month. But, she said, any rate rise would not be dramatic.
Sterling rose against the euro and held steady against the dollar following the release of today's minutes. The pound rose to a seven-week high against the dollar yesterday, leaving it above the $1.90 mark amid expectations that UK interest rates would rise, making sterling more attractive.
http://www.guardian.co.uk/business/story/0,3604,1423538,00.html