Bank edges closer to hike in rates

First published in Property News

© Press Association 2011

The pressure of soaring inflation saw the Bank of England edge closer to an interest rate hike days before figures revealed a shock reversal in economic growth in the UK.

The number of votes in favour of tightening policy increased at the Bank's January rates meeting, but the decision a fortnight ago was made before data showed gross domestic product declined 0.5% between October and December.

The details of the meeting followed a warning from Bank governor Mervyn King that the UK was facing the biggest squeeze on living standards since the 1920s as inflation moves towards 5% in coming months and wage growth slows down.

The minutes laid bare the challenge faced by the Monetary Policy Committee (MPC) as it grapples with a toxic combination of stubbornly high inflation and stagnant economic growth. Surging food costs and petrol prices led to an increase in the CPI rate of inflation from 3.3% to 3.7% in December.

The figures prompted warnings from economists that a rate hike was likely to come sooner than expected. Unconvinced that price rises are temporary, MPC members Andrew Sentance and Martin Weale voted to increase interest rates from 0.5% to 0.75%. In previous months, Mr Sentance had stood alone in calling for a quarter point rise.

In a speech at Newcastle's Civic Centre on Tuesday night, Mr King warned real wages will be no higher than 2005 levels as prices soar and the Government's deficit-busting actions take effect. But he defended the MPC's decision to hold rates at their historic low for 22 months.

He said: "Monetary policy cannot change the amount that we in the UK have to pay to buy food and other commodities, such as energy, from the rest of the world. Nor can it alter the need for a fall in the prices of the products that we sell to the rest of the world relative to world prices in order to reduce our trade deficit and rebalance the UK economy.

"Monetary policy can affect the inflation rate at which these adjustments take place, but it cannot alter the fact that, one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies. If the MPC had raised the bank rate significantly, inflation might well have started to fall back this year, but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now. The erosion of living standards would have been even greater."

However, economists said Tuesday's GDP figures had skewed any decisions made at this month's rates meeting and Philip Shaw, economist at brokers Investec, said a rate increase in the near future was looking more unlikely.

He said: "Putting the bank rate up next month, bearing in mind that cuts in public spending will begin to take effect in April, would be jumping the gun somewhat, to say the least. If and when survey and official data show evidence that the economy is expanding, it might be game on for a more serious set of rate hike discussions. But until then we would be surprised if a majority on the MPC voted to raise rates."

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