The Bank of England may be close to raising interest rates for the first time in three years, after nearly half of its rate-setting committee pressed for higher rates at its most recent meeting.
Four out of the nine members of the central bank's monetary policy committee (MPC) wanted to raise interest rates this month by a quarter of a percentage point from their 48-year low of 3.5%.
The newly published minutes of the meeting on 9 October revealed that deputy governor Andrew Large, executive director Paul Tucker and external MPC members Kate Barker and Stephen Nickell, all voted in favour of raising rates to ensure inflation remained on track to hit its 2.5% target.
This certainly puts the cat among the pigeons
Peter Dixon, Commerzbank
They were worried that the recent record rise in consumer debt could risk a sudden crash in consumer spending.
But other MPC members argued that "a premature rise in the rate might choke off the improvement in business conditions", the minutes said.
Since the new governor of the Bank of England, Mervyn King, has also expressed concern about the unsustainable consumer boom in a recent speech, many analysts are now convinced that the Bank's MPC has the votes for an interest rate rise before Christmas.
Financial futures markets have already priced in a quarter-point rise by January and an increase in interest rates by one percentage point within a year.
Hike 'by New Year'
The MPC minutes also expressed particular worry about the strength of the housing market.
WILL RATES HAVE TO RISE?
"The Committee agreed that house prices, housing market activity and mortgage borrowing all suggested that consumption growth would not moderate as quickly as previously expected," they said.
The voting figures took many observers by surprise, with most expecting a seven-two vote in favour of keeping rates on hold, after the Bank had voted nine-zero in September for a rate freeze.
"This certainly puts the cat among the pigeons. We've had five-four votes in the past that have been followed by a 'no change' in rates the next month so this does not necessarily point to a rise in November but it certainly raises the possibility," said Peter Dixon of Commerzbank.
Later this week crucial figures will be released showing the rate of growth of the UK economy in the July-September quarter.
The government statistics office has meanwhile released major revisions to its UK growth figures for the last quarter, prompting some MPC members to wait for the Bank's own analysis of economic conditions which is released in mid-November before making a decision.
New target
Recent figures have shown that since July, the month when interest rates were cut to 3.50%, UK consumers racked up the biggest increase in total borrowing on record, according to Bank of England figures.
High Street sales have also risen, causing concern that inflation could climb even further above government targets.
New retail sales figures will also be released later this week.
The Bank of England will be told later in the year by the Chancellor that it must adopt a new inflation target and a new measure of inflation.
Some observers believe it may want to take action before the new framework, with its accompanying uncertainty, is put into place. |
