Move toward interest rate rise expected

 
Julian Harris
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THE Bank of England is moving closer to a hike in interest rates, it is expected to reveal this week.

The latest voting record of the Bank’s monetary policy committee (MPC) could expose more members voting for the 0.25 per cent rise when it is revealed on Wednesday, according to some analysts.

Two MPC members voted for a rise last month, with Martin Weale joining Andrew Sentance’s ongoing call for a modest step towards bank rate normalisation.

“We are suggesting that the vote was 6-3 this time, perhaps with David Miles also favouring an increase,” said Investec’s Philip Shaw.

“And it is not impossible that the outcome was 5-4,” he added.

David Miles is the most likely member of the MPC to join the side supporting a tightening of policy, agreed Alan Clarke of BNP Paribas, while many observers are pointing to the increasingly hawkish comments of the Bank’s deputy governor Charles Bean.

A rate rise could also be sharper than expected, according to Douglas McWilliams of the Centre for Economic and Business Research.

“I think there will be a temptation for the MPC to show it’s serious, by moving 0.5 per cent upwards rather than 0.25 per cent,” McWilliams said.

With sluggish growth and spiralling prices, the UK is at risk of “stagflation,” McWilliams added.

Instead of being driven by domestic labour costs, Britain now faces inflation from primary product prices, “which are immensely volatile and driven by international conditions,” McWilliams said.

In a hard hitting speech last week, the MPC’s chief hawk Andrew Sentance warned: “The UK is a very international economy and global influences are a major issue for the course of demand and inflation in the British economy.”

“The value of the pound on the foreign exchanges therefore needs to be one of the key areas of focus for the MPC,” Sentance said.

Nudging up rates might bring about a “modest appreciation of sterling,” he said, protecting Britain from price pressures from abroad.