News Column

MPC reinforces a gradual rise in base rates

June 19, 2014

IAN McCONNELL; IAN McCONNELL BUSINESS EDITOR

MEMBERS of the Monetary Policy Committee viewed the low probability attached by financial market players to a rise in benchmark UK interest rates by the end of 2014 as "surprising", minutes of their latest meeting have revealed.

Minutes of the Bank of England committee's June 4 and 5 meeting, published yesterday, reveal that the nine-strong MPC was again unanimous in its vote to hold base rates at a record low of 0.5 per cent two weeks ago.

There had been some speculation that external MPC member Martin Weale might have begun to vote for a rise in base rates as early as this month. This speculation intensified in the wake of a speech from Mark Carney last Thursday, in which the Bank of England Governor declared the first rise in base rates "could happen sooner than markets currently expect".

While Mr Weale continued to vote for no change in rates this month, the minutes of the meeting state: "For some members, the policy decision had become more balanced in the past couple of months than earlier in the year."

This will fuel the belief that one or more MPC members could start voting for a rise in rates soon.

The minutes show the MPC noted two weeks ago that analysis of options prices suggested financial market participants put only around a 15 per cent chance on a rise in rates by the end of 2014.

Giving an insight into MPC members' view of this, the minutes state: "The relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising."

Mr Carney's speech has led economists to conclude there is now a significant possibility of a rate rise by the year-end.

Incoming MPC member Kristin Forbes yesterday added to the more hawkish tone from policy-makers by warning interest rates might eventually have to rise more abruptly if policy-makers were to wait too long for information about risks building in Britain's economy before acting.

This statement appears to chime with some of the discussion among MPC members this month.

Minutes of the June 4 and 5 meeting state: "The case for raising Bank Rate gradually and cautiously was reinforced by uncertainty over its likely impact on the economy, following the long period at 0.5 per cent, although it could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy."

However, MPC members also noted there were dangers of raising rates too soon.

Detailing their discussions, the minutes state: "If policy were tightened prematurely, however, that could be associated with considerable costs in terms of lost output. That was particularly important when the starting point was one from which interest rates could not easily be reduced."

In a speech yesterday to the Confederation of British Industry in Northern Ireland, Mr Weale set out his reasons for believing the rates decision was more balanced than it was some months ago.

He said that, on the one hand, existing measures of under- employment might be overstating the underlying amount of spare capacity in the labour market.

Mr Weale added: "One factor is that people who have been recently unemployed are less productive than average. If this is the case, then as the economy continues to grow, unemployment could fall more quickly than the MPC expects. That on its own certainly points to a need for a policy profile tighter than in our May forecast."

He cited, on the other hand, the "continuing unusual weakness in wages", which he said might indicate there was more spare capacity in the economy than the MPC had assumed.

Mr Weale added: "Should wage growth fail to revive, that will, on its own, tip the scales further in favour of maintaining a strong monetary stimulus."

He declared, even after rates started to rise, monetary policy would still be providing considerable support for the economy.


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Source: Herald, The (Scotland)


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