MPC moves closer to interest rate hike

City A.M. Reporter
Bank of England policymaker Martin Weale unexpectedly joined Andrew Sentance in voting for a quarter-point rate rise this month, minutes to the Bank's January Monetary Policy Committee meeting showed.

The minutes said the MPC explicitly considered the case for a rate rise in January, and that for some members this was a finely balanced decision.

"For most members, recent developments implied that the risks to inflation in the medium term had probably shifted upwards," the minutes said.

However, the MPC deliberations took place before policymakers knew that the economy unexpectedly contracted by 0.5 per cent in the last three months of 2010.

The MPC opted to keep rates on hold, citing downside risks to inflation from spare capacity, fiscal austerity, a potential jolt to exports from the euro zone crisis as well as tight credit conditions.

"Some members also noted that an increase in Bank Rate ... might be misinterpreted as a signal that the Committee would attempt to bring inflation back to target excessively rapidly, which could cause expectations of a relatively sharp tightening of monetary policy that could have a detrimental impact."

The MPC had access to an early estimate of December's 3.7 per cent inflation reading but did not know about the scale of the impact on growth from December's harsh weather.

Their expectation was that the economy would grow roughly in line with trend in late 2010 and early 2011, despite snow in December and a rise in value added tax in January.