Interest rate rise is still no certainty yet
THE minutes from this month’s meeting of the Bank of England’s monetary policy committee (MPC), which are due out tomorrow, will be scanned even more closely than usual for indications of when interest rates might start to rise.
In its latest quarter forecast last week, the bank said inflation was likely to carry on rising, from January’s figure of 4% to around 5%, before falling back close to the official 2% target next year.
The bank’s forecast specified that this assumed an increase in interest rates in line with City expectations of a rise from the second quarter of this year.
In comments to the media following the report’s publication, however, governor Mervyn King said that it might still be “many quarters” before the MPC moved on rates.
On the other hand, committee “hawk” Andrew Sentance, who has been voting for a rise in rates since last summer, warned that the MPC was underestimating the threat of inflation and that it was in danger of having to play “catch-up” on rates, possibly damaging the economy recovery.
You may also want to watch:
The minutes due out tomorrow will reveal whether Mr Sentance has gathered any further support for an increase, besides committee colleague Martin Weale who joined the call for a rise for the first time at January’s meeting.
With inflation having now been above target for 23 out of the last 33 months, it is understandable that there are also complaints from outside the MPC that its credibility is at risk but, as Mr King rightly indicated in his comments last week, the case for an early rise in rates is by no means clear cut.
- 1 Get ready for League One's 'Arizona Derby' as Lincoln follow Town with Phoenix investment
- 2 Shop opens at Suffolk village pub
- 3 Why these Suffolk villages were named among 'most beautiful to visit'
- 4 'If offers are higher elsewhere, so be it' - Wigan CEO on losing Evans to Ipswich
- 5 Saxmundham man, 26, appears in court charged with 11 child sex offences
- 6 Traffic at standstill on A12 between Ipswich and Colchester
- 7 Ipswich Town transfer rumour: Blues 'in £100,000 tug-of-war' for non-league midfielder
- 8 Thunderstorms expected to continue until Saturday in Suffolk and Essex
- 9 Man and woman charged in connection with the theft of 85 dogs
- 10 'We're keeping about 10% of the roster' - Johnson on Ipswich squad overhaul
During the past 33 months, inflation has reached a peak of 5.2% in September 2008 but has also hit a low of 1.1% in September 2009 – within a whisker of Mr King having to write to the Chancellor to explain missing the target on both the up and the down side within a year.
Throughout the first half of this period the economy was in recession, making an increase in rates virtually out of the question, while for the past year the inflation figure has been distorted by increases in VAT, first the reversal of the temporary cut to 15% by the last government and then the increase from 17.5% to 20% by the coalition last month.
Add to this the impact of commodity prices, which an increase in interest rates would do nothing to control, it can be seen that the MPC is right to have resisted calls for a rise so far.
The time to increase rates will be when there is evidence of a sustained recovery in the economy and of “secondary” inflation in the form of high wage settlements. Such conditions might indeed emerge during the second quarter but, with the scale of the bounce-back from the decline in GDP seen during the final quarter of 2010 yet to be seen, it is no certainty yet.