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Economy: Two members of the MPC back an immediate rise in interest rates

10:37 20 August 2014

Martin Weale, an independent member of the Bank of England

Martin Weale, an independent member of the Bank of England's Monetary Policy Committee, who was one of two members to back a 0.25% rise in interest rates at this month's meeting.

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Two members of the Bank of England’s monetary policy committee (MPC) have broken ranks and voted for a 0.25% rise in interest rates, it emerged today.

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The minutes of the MPC’s meeting earlier this month showed that Ian McCafferty and Martin Weale dissented from the majority view of seven other members, including governor Mark Carney, that rates should be kept on hold.

It is the first split vote on rates since July 2011, although at least three more MPC members will need to shift their stance for the bank’s rate to be raised from 0.5% at which it has been held since 2009.

Rate-setters must weigh up the need to keep control of inflation with the risk that higher rates could derail the upturn.

Details of the latest discussions published by the bank revealed that most still felt that “there remained insufficient evidence of inflationary pressures” to justify an increase.

But the minutes added: “For two members, in particular, economic circumstances were sufficient to justify an immediate rise in bank rate.”

In response to the minutes, the pound climbed a cent against the euro and was also up against the US dollar. However, yesterday’s inflation data, showing that the Consumer Price Index eased to 1.6% last month from 1.9% in June was more benign than expected, giving the MPC more scope to delay an increase in interest rates.

Samuel Tombs, senior UK economist at Capital Economics, said the split vote meant that it “would be foolish” to rule out the possibility of a rise in rates during 2014.

“External members Martin Weale and Ian McCafferty both voted to raise interest rates to 0.75%. Although wage growth has remained weak, they emphasised that it was a lagging indicator of the amount of slack in the economy and that, given the time it takes for interest rate changes to affect the economy, it would be desirable to begin raising interest rates before all of slack had been used up.

“Nonetheless, data released since the MPC’s meeting not least the fall in inflation to 1.6% in July and the slower growth in employment have eased the pressure on the committee to tighten quickly. Moreover, inflation still looks on track to ease much further than the MPC expects this year and to remain weak in 2015.

“For now, then, we still expect the first hike to come in February 2015. But, even if the committee decides to get on the front foot and raise interest rates before the end of the year, low inflation should ensure that the pace at which they rise is extremely gradual by historical standards.”

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