This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.theguardian.com/business/2014/jun/18/interest-rates-rise-bank-of-england-minutes

The article has changed 3 times. There is an RSS feed of changes available.

Version 1 Version 2
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 20 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 Bank of England last night left markets guessing about the timing of the first increase in interest rates since 2007 after two members of its monetary policy committee (MPC) said they were adopting a wait-and-see approach to borrowing costs.
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. On a day when it emerged that Threadneedle Street's nine-strong MPC had voted unanimously to keep rates on hold at 0.5%, Andy Haldane, the Bank's newly-appointed chief economist, said the timing of a tightening of policy was "difficult".
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. Haldane's comments came within hours of a separate speech by Martin Weale – seen by the financial markets as the least dove-ish MPC member – in which he said the Bank should be on the alert for falling unemployment and rising productivity to put upward pressure on wages.
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. The City has begun speculating about a rate rise coming before Christmas since the Bank's governor, Mark Carney, used his Mansion House speech last week to say borrowing costs could go up sooner than expected.
"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." But although the minutes of the June MPC meeting said some members thought the policy decision had become "more balanced", the vote to keep rates unchanged was again 9-0.
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. While the minutes echoed Carney's speech by expressing surprise that there was little expectation of a rate rise before the end of 2014, the lack of any dissenting votes on the MPC left the City unsure about whether the Bank would move late this year or in early 2015.
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." In a speech in Scarborough, Haldane used a cricketing metaphor to outline the Bank's interest-rate dilemma. There was a choice, he said, between going on the "back foot" and waiting or going on the "front foot" and making an earlier decision to push up the cost of borrowing.
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." Haldane said playing off the back foot had "the advantage of giving the batsmen more time to get a read on the trajectory of the ball as it swings and darts around. It avoids the risk of lurching forward and then needing hurriedly to reverse course if the first movement is misjudged.
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". He added: "But this strategy is not riskless. Playing late relies on having an uncannily good eye and strong nerve. It runs the risk of having to react fast and furiously to avoid missing the ball entirely. An earlier front foot movement would avoid that risk, allowing a more gradual movement forward."
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. Weale, one of the four independently appointed members of the MPC, said in a speech in Belfast that it was possible the Bank was over-estimating the amount of spare capacity in the economy and that this would point to an earlier rise in interest rates than suggested by Threadneedle Street's most recent quarterly inflation report, released last month.
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. Weale said: "One factor is that people who have been recently unemployed are less productive than average. If this is the case, then as the economy continues to grow, unemployment could fall more quickly than the MPC expects. That on its own certainly points to a need for a policy profile tighter than in our May forecast."
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. In contrast, the weakness of wages could indicate more spare capacity in the economy than the MPC has assumed. He added: "Should wage growth fail to revive, that will, on its own, tip the scales further in favour of maintaining a strong monetary stimulus."
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." News this week that inflation fell to 1.5% in May, its lowest level in almost five years, has given the MPC extra flexibility over the timing of a rate rise.
"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 minutes said there was a risk that growth would not slow in the second half of the year, with the 1-1.5% of spare capacity estimated by the Bank being used up more quickly than expected.
"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.
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.