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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (6697)	5/19/2004 6:08:15 PM
From: CalculatedRisk	Respond to of 116555

UK: MPC voted unanimously to raise rates By Scheherazade Daneshkhu, Economics Correspondent Published: May 19 2004 11:41 \| Last Updated: May 19 2004 11:41 news.ft.com The Bank of England considered raising interest rates by half a percentage point this month, suggesting that the cost of borrowing may increase more quickly than expected. In the end, the nine-member monetary policy committee decided unanimously that the arguments for a quarter point increase in the main rate to 4.25 per cent were "decisive", according to the minutes of the meeting, released on Wednesday. Howard Archer, a managing director of Global Insight, the consultancy, said the minutes were more hawkish than expected. "It is clear that a 50 basis points hike is becoming an increasing possibility as the bank tries to get more of an impact from its monetary policy tightening," he said. Although only one member, Sir Andrew Large, deputy governor for financial stability, had voted for a rate rise in April, this month the MPC agreed that rates needed to go up - the only question being by how much. The need for a rate rise was based on the MPC's new inflation forecasts which showed inflation above its 2 per cent target in two years, even taking into account market expectations for the level of interest rates. Last week, governor Mervyn King, presenting the inflation forecast, made clear that May's interest rate rise - the third in six months - would not be enough to head off growing inflationary pressure. A half-point rise could be "warranted by the committee's central projection" for inflation, according to the minutes and might be more effective in curbing inflationary pressure than smaller, more gradual moves. A steeper rise would also have the advantage of surprise, which "might help to moderate the continuing rapid rate of increase in consumer indebtedness by affecting the behaviour of both borrowers and lenders." However, the current low rate of inflation and the contiunued need for caution given the uncertainty of how heavily-indebted consumers might react to higher rates, swung the argument in favour of a quarter point rise. The annual rate of consumer price inflation was 1.2 per cent in April, up from 1.1 per cent in March. The minutes also implied that the MPC believed the economy was growing more strongly than the official data indicated. The 0.6 per cent estimate by the Office for National Statistics for economic growth in the first quarter "had been surprisingly weak but other evidence was consistent with a higher figure," the minutes noted. Alan Castle of Lehman Brothers said this suggested that if the official data continued to be weaker than expected, the MPC would not need to be as hawkish as implied in the minutes. "A more aggressive pace of tightening is not a given. That said, the burden of proof does seem to have shifted somewhat. There need to be some clear signs that the Bank's forecast for very strong near-term growth is wrong," he said. But James Knightley of ING Capital Markets said the next rate rise was likely to be sooner rather than later. "It looks increasingly likely that they may not wait until the next Inflation Report to raise rates, making July the most likely time for a hike, given inflation is likely to have crept higher by then."