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Interest rate rises: Bank of England minutes hint at shift of stance Interest rate rises: Bank of England minutes hint at shift of stance
(about 2 hours later)
The prospect of a rise in interest rates before the end of 2014 appeared to grow on Wednesday after the Bank of England paved the way for an end to emergency policy after more than five years.The prospect of a rise in interest rates before the end of 2014 appeared to grow on Wednesday after the Bank of England paved the way for an end to emergency policy after more than five years.
The minutes of the Bank's June meeting of the monetary policy committee were littered with hints that members were moving closer to increasing rates which have been held at an all time low of 0.5% since March 2009 in response to the financial crisis. The minutes of the Bank's June meeting of the monetary policy committee were littered with hints that members were moving closer to increasing rates, which have been held at an all-time low of 0.5% since March 2009 in response to the financial crisis.
The nine-strong MPC voted unanimously in favour of leaving rates at 0.5% and quantitative easing unchanged at £375bn at its June meeting, in line with expectations.The nine-strong MPC voted unanimously in favour of leaving rates at 0.5% and quantitative easing unchanged at £375bn at its June meeting, in line with expectations.
However, in the latest signal that the committee is shifting its stance, members expressed surprise that there was little expectation for a rate rise by the end of the year.However, in the latest signal that the committee is shifting its stance, members expressed surprise that there was little expectation for a rate rise by the end of the year.
"There was a risk that growth would not slow in the second half of the year so that, without a corresponding rise in supply, slack would be absorbed more quickly than had previously been expected. In that context, the relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising." "There was a risk that growth would not slow in the second half of the year so that, without a corresponding rise in supply, slack would be absorbed more quickly than had previously been expected. In that context, the relatively low probability attached to a Bank rate increase this year implied by some financial market prices was somewhat surprising."
Economists had predicted the unanimous outcome of the June but said the language used in the minutes suggested a rate hike is now more likely by the end of the year, if economic recovery remains on track. Economists had predicted the unanimous outcome of the June meeting, but said the language used in the minutes suggested a rate rise is now more likely by the end of the year, if the economic recovery remains on track.
Chris Williamson, chief economist at Markit, said: "The minutes from the latest MPC meeting add to the expectation that rates will start to rise later this year, providing the economy maintains its current momentum as we move through the summer months. Chris Williamson, chief economist at Markit, said: "The minutes from the latest MPC meeting add to the expectation that rates will start to rise later this year, providing the economy maintains its current momentum as we move through the summer months."
Howard Archer, chief UK economist at IHS Global Insight, agreed: "The minutes of the June MPC meeting do little to dilute substantially increased expectations that the Bank of England will lift interest rates from 0.50% to 0.75% before the end of 2014."Howard Archer, chief UK economist at IHS Global Insight, agreed: "The minutes of the June MPC meeting do little to dilute substantially increased expectations that the Bank of England will lift interest rates from 0.50% to 0.75% before the end of 2014."
Governor Mark Carney has been sending mixed signals, shocking the City last week with his Mansion House speech assertion that a rate rise "could happen sooner than markets currently expect". Mark Carney, the Bank governor, has been sending mixed signals, shocking the City last week with his Mansion House speech assertion that a rate rise "could happen sooner than markets currently expect".
This came just a month after he said in the May inflation report the first rise was most likely in the second quarter of 2015, which is around the time of the general election. This came just a month after he said in the May inflation report that the first rise was most likely in the second quarter of 2015, which is around the time of the general election.
Economists predicted that divisions will begin to emerge between members in the coming months, as they increasingly disagree about the amount of slack in the economy to be used up.Economists predicted that divisions will begin to emerge between members in the coming months, as they increasingly disagree about the amount of slack in the economy to be used up.
The MPC currently estimates there is 1-1.5% of spare capacity in the economy, following the UK's below-par performance at the onset of the crisis in 2008. The MPC now estimates there is 1-1.5% of spare capacity in the economy, following the UK's below-par performance at the onset of the crisis in 2008.
The minutes said: "For some members, the policy decision had become more balanced in the past couple of months than earlier in the year. In terms of the immediate policy decision, however, all members agreed that, in the absence of other inflationary pressures, it would be necessary to see more evidence of slack being absorbed before an increase in Bank Rate would be warranted." The minutes said: "For some members, the policy decision had become more balanced in the past couple of months than earlier in the year. In terms of the immediate policy decision, however, all members agreed that, in the absence of other inflationary pressures, it would be necessary to see more evidence of slack being absorbed before an increase in Bank rate would be warranted."
"The case for raising Bank Rate gradually and cautiously was reinforced by uncertainty over its likely impact on the economy, following the long period at 0.5%, although it could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy. "The case for raising Bank rate gradually and cautiously was reinforced by uncertainty over its likely impact on the economy, following the long period at 0.5%, although it could be argued that the more gradual the intended rise in Bank rate, the earlier it might be necessary to start tightening policy.
"The economy was starting to return to normal. Part of that normalisation would be a rise in Bank Rate at some point." "The economy was starting to return to normal. Part of that normalisation would be a rise in Bank rate at some point."
Working against an early rate rise the committee noted the weak wage growth of recent months, which suggested a substantial amount of slack remained in the economy. Working against an early rate rise, the committee noted the weak wage growth of recent months, which suggested a substantial amount of slack remained in the economy.
Inflation meanwhile fell to 1.5% in May, its lowest level in almost five years, affording the MPC flexibility over the timing of a rate rise.Inflation meanwhile fell to 1.5% in May, its lowest level in almost five years, affording the MPC flexibility over the timing of a rate rise.