INTEREST rates have been held at a historical low of 0.5 per cent for two years this week, as the Bank of England meets to decide whether to begin normalising policy.
Hawkish sentiment is on the rise in 2011, with two members of the Bank’s monetary policy committee (MPC) joining Andrew Sentance’s call for monetary tightening.
Only two more of the MPC’s nine voting members need to switch sides to induce a rise in the Bank rate. The Bank announces its decision on Thursday.
“We see its decision as being on a knife-edge,” said Alan Clarke of BNP Paribas. “The European Central Bank’s flagging of a potential rate hike in April will encourage those looking for an early Bank of England move,” Clarke added.
The ECB is widely expected to increase rates, after president Jean-Claude Trichet dropped strong hints last week.
At least one Bank member will “almost certainly” join the three voting for a rise, said Scott Corfe of the Centre for Economic and Business Research.
The dollar has languished against the pound and the euro on the back of interest rate expectations, according to Capital Economics. “Investors have become more convinced about the prospect of tighter monetary policy in Europe,” said economist John Higgins.
However, some analysts expect the MPC to wait for solid signs of the UK bouncing back from disappointing GDP results at the end of 2010.
“Although inflation is high at present, the case for a rate rise is complicated by weaknesses in other economic indicators,” said Corfe.
Business surveys indicated renewed yet uninspiring growth in February.
Evidence of inflation in the UK will be clearer on Friday, with the release of producer price data for February.