Economy: No further support among MPC members for an early rise in interest rates

Martin Weale, one of two members of the Bank of England's Monetary Policy Committee who supports a r

Martin Weale, one of two members of the Bank of England's Monetary Policy Committee who supports a rise in interest rates. - Credit: Archant

A split between Bank of England policymakers over when to raise interest rates from their record low has continued, but with no increase in support for an increase.

Monetary Policy Committee (MPC) members Martin Weale and Ian McCafferty again argued this month that the bank needed to act now in order to pre-empt wage and inflationary pressures further ahead, minutes of the meeting revealed today.

The same duo caused the MPC’s first split decision on rates since July 2011 when they voted for a rise of 0.25% to 0.75% at August’s meeting.

But this month as last they were outvoted after the other seven members of the committee, including governor Mark Carney, said there was insufficient evidence of inflationary pressures to justify an immediate increase.

They said a premature tightening in monetary policy might leave the economy vulnerable to shocks, limiting the scope for any stimulus that subsequently became necessary.

Most economists now expect the first rates rise to come in February, with the prospect of an increase before the end of 2014 seen as having receded, and Mr Carney has stressed that when they do come they will be “gradual and limited”.

Samuel Tombs, senior UK economist at Capital Economics, said: “The minutes of September’s UK MPC meeting strike a fairly dovish tone.

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“The two members wishing to raise interest rates failed to recruit any other members. And the committee pointed to evidence suggesting that the recovery might slow in Q4 and argued that the eurozone’s growing malaise meant that ‘the downside risks to UK growth in the medium term had probably increased’.

“What’s more, various passages of the minutes suggest that the committee is placing more emphasis on the current weakness of CPI inflation and pipeline price pressures, than on theoretical estimates of the amount of spare capacity. Given that CPI inflation looks set to continue to ease over the rest of this year, the chances of a 2014 rate hike now look slim.”

He added that the latest UK labour market data, also released today, suggested that the economic recovery was being increasingly fuelled by growth in productivity rather than jobs.

“Employment grew by 74,000 (or 0.2%) in the three months to July, the least in over a year,” he said. “With the business surveys indicating that GDP might expand by close to 1% on the previous quarter in Q3, this suggests that productivity might finally be beginning to recover.

“And although this was still sufficient for the ILO unemployment rate to fall from 6.4% to 6.2%, there still appears to be a large margin of slack in the labour market. The continued weakness of annual growth in average weekly earnings – just 0.6% in the three months to July – supports this.”