One of the MPC’s nine members, Dr Martin Weale, has indicated that the Bank of England should be prepared to raise the cost of borrowing as early as August.
The comments indicate the monetary policy committee could soon face a split over when to raise interest rates from the historic low of 0.5 per cent they have remained at since the financial crisis. When the global financial crisis broke in 2008, interest rates were at five per cent. This comes after the MPC voted unanimously against raising interest rates last month, according to minutes from the June meeting.
Alongside Ian McCafferty, Weale had voted for interest rate rises last year between August and December, but changed his stance after oil prices plummeted.
"The fall in the oil price … and the fact that food prices have taken about 1.5 percentage points off the inflation rate — obviously that gives you some breathing space," he said in an interview with the Financial Times. Yet, he added this will soon be coming to an end.
Rising wages and low unemployment are indicating a tightening labour market, which requires a response, even if low oil prices kept inflation down for longer than expected, he added.
Yet, most of the MPC will still want to keep rates at 0.5 per cent, with Weale saying he was one of two members who were contemplating a rate rise.
The difficulty in the decision arises from a balancing act between a stronger labour market outlook against low inflation rates. Inflation was at only 0.1 percent in May, up from -0.1 per cent in April, as measured by the Consumer Prices Index, while unemployment was steady at 5.5 per cent.
It is the stronger wage growth data that is pushing Weale towards voting for a rate rise, he said, as wage growth in Britain hit a four-year high of 2.7 per cent in April, up from 2.3 per cent in March, and compared to 0.7 per cent in April last year.
However, Brenda Kelly, head analyst at London Capital Group, said:
MPC member Weale’s comments have hit their mark this morning with the house builder sector under pressure on fears that a rate hike may be imminent. Given that the Monetary Policy Committee voting breakdown remains unchanged at 9-0, it is still rather unlikely that the Bank of England will act as early as August on interest rates. There is a strong possibility that a hike will come before year end but it will be the latter part of Q4 at least.