Calls grow for rate rise
TWO of the Bank of England's monetary policy committee members voted for a rise in interest rates earlier this month, it was revealed today. Minutes from the monthly meeting show Paul Tucker, who also voted for a rate rise in February, and Andrew Large, one of the committee's more hawkish members, opted for a quarter-point rise while other members voted to freeze base rate at 4.75%.
Economists expect at least one increase in rates this year, with most pencilling in April or May. The 7-2 vote will raise concerns that an increase will come sooner rather than later.
'A modest rise in interest rates now would help to pre-empt inflationary pressures and an increase in interest rates this month would not be a major surprise,' the rebel voters argued in the committee's notes.
The Office of National Statistics said yesterday that consumer prices index inflation held steady at 1.6% in February, although the figure is up from a low of 1.1% in October. The Bank expects it to pass through the crucial 2%-mark in 2006 before rising further. The MPC's Government-set target is to keep inflation under 2%, two years ahead.
Given that rate rises take at least 18 months to fully impact on the economy, experts were surprised that the Bank had remained dovish on rates for so long. The base rate has been pegged at 4.75% since last August.
The MPC noted that the price of oil had risen 20% since its last meeting but doubted a significant impact on UK petrol prices, due to high taxation, and therefore saw little knock-on effect for inflation.
It also said 'rapid' growth in unsecured debt was likely to increase the 'vulnerability of some consumers to future shocks and that the current slowdown in consumer spending may be 'temporary'.
'There was some evidence that the housing market was stabilising,' the notes added. 'An average of the lenders' indices was unchanged in February and house prices appeared to have remained more or less flat for the past few months.'
Howard Archer, chief economist at City research firm Global Insight, stuck by his forecast of a rate rise in May. 'While Andrew Large joined Paul Tucker in voting for a rate hike in March,' he said, 'the overall tone of the minutes indicate that most MPC members are still prepared to sit on the sidelines for now given a number of ongoing uncertainties relating to the growth and inflation outlooks.'
However, weak manufacturing figures out today eased pressure for a rate rise. Order books shrunk over the past month, with companies blaming 'challenging' economic conditions and spiralling oil prices. The CBI said manufacturers were scaling back output expectations in the face of subdued demand.
The survey dashed hopes that manufacturing, which narrowly avoided recession last year, has turned the corner.
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