Bank officials set to clash over rate hike
BANK of England officials will this week clash over when to raise interest rates – with some set to argue for an immediate increase.
Governor Mark Carney last month hinted that rates could rise at ‘around the turn of this year’ as the recovery strengthens.
But at least two members of the nine-strong monetary policy committee that sets rates are expected to vote for a hike when the panel meets this week.
They are most likely to be Martin Weale and Ian McCafferty. The pair may be backed by the previously dovish David Miles, along with Kristin Forbes.
They are likely to be outvoted by the other members – including Carney – but the split will be seen as a sign that the central bank is edging closer to raising rates.
Higher interest rates would push up mortgage costs for millions of borrowers – including some who have never experienced a hike.
The last interest rate rise came in July 2007 and rates have not moved in either direction since March 2009 when they were slashed to an all-time low of 0.5pc.
The interest rate decision and details of how officials voted will be published on Thursday alongside the Bank’s inflation report which outlines its latest forecasts for the economy.
The economy picked up pace over the spring, growing by 0.7pc in the second quarter of the year, having slowed to 0.4pc in the first three months.
Inflation has fallen to zero – meaning prices are no higher than they were last year – but some central bank officials fear it could rise back above the 2pc target in the coming years if rates stay at rock bottom.
Vicky Redwood, chief UK economist at Capital Economics, said: ‘This month’s MPC vote will probably be split for the first time this year.’
Carney has been at pains to warn households and businesses that rates cannot stay at emergency lows indefinitely.
But he has said that when rates do rise it is likely to be at a ‘gradual’ pace and to a ‘limited’ degree.
He recently suggested rates may rise to only 2.25pc in the coming years – around half the average level seen over the past three centuries.
Howard Archer, chief UK economist at IHS Global Insight, said: ‘We expect at least two – and very possibly three - of the nine MPC members to vote for interest rates to be lifted to 0.75pc.’
The financial services sector would benefit from an early rise in rates, claims Chris Price, a partner at EY, because it would widen the gap between loan and savings rates, allowing banks to make a bigger profit margin.
The EY Financial Services report found that a sevenyear squeeze on business lending is about to reverse, as credit to firms grows for the first time since 2008.
Bank lending to businesses peaked in 2008 at £575bn, but has dropped year- onyear ever since.
However, with the economy growing at a steady pace and business investment set to rise at an annual average of 6.5pc over the next three years, the forecast suggests that the days of the lending squeeze are in the past.