Hint of earlier interest rate rise


Published: Wednesday 22nd April 2015 by The News Editor

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The prospect of an interest rate rise appeared to edge slightly closer today after the Bank of England said inflation might recover more quickly than previously expected.

Sterling rose one cent against the US dollar to 1.50 after the Bank published the minutes of this month’s meeting of the rate-setting Monetary Policy Committee (MPC).

The committee’s nine members voted unanimously to leave rates at 0.5%, where they have been held for six years – though for two members the decision this month was “finely balanced”.

Britain’s economic recovery has spurred expectations of a coming hike in rates but a slump in Consumer Price Index (CPI) inflation has put the brakes on this and markets now broadly expect a rise not to come until 2016.

Today’s minutes showed the Bank expects that CPI “would briefly turn negative at some point in the coming months”, similar to its previous comments about the path of inflation this year.

But they also said the impact of the strength of the pound – making imported goods cheaper and therefore pushing down inflation – could be “feeding through more quickly into the CPI than expected”.

The minutes said: “That could mean less downward pressure on prices to come and a faster pick-up in inflation when the effects of recent falls in energy and food prices drop out of the annual comparison.”

Analysis of the surge in jobs also appeared to take a “hawkish” tone. The MPC said it was unlikely that “growth could be maintained at its current pace for long, without generating greater inflation in wages and prices” unless productivity improves.

Despite the current weakness of inflation, the likelihood of it rising over the next couple of years would add to expectations of a rate hike, as the Bank targets a 2% CPI rate over the next couple of years.

However, the minutes also acknowledged the risk of “weak price pressures” persisting for longer than expected. The Bank’s expectation for wage growth in the second quarter was revised down from 2.6% to 2.3%.

James Knightley, of ING Bank, said: “This appears to be a mildly more hawkish assessment from the Bank of England, with two MPC members regarding the decision as ‘finely balanced’ as to whether to tighten policy.

“Were it not for election uncertainty, we think that the market would be more convincingly looking for a rate rise this year.

“Should the election proceed smoothly (or more smoothly than the market is anticipating) then we suspect a November move remains a distinct possibility.”

Samuel Tombs, of Capital Economics, said: “The minutes to April’s MPC meeting show that the Committee has become slightly less concerned by the downside risks to the inflation outlook.

“Nonetheless, with CPI inflation unlikely to approach the 2% target until well into 2016 and productivity primed for a recovery, we think there will be little pressure on the MPC to raise rates this year.”

Published: Wednesday 22nd April 2015 by The News Editor

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