Growing pressure to raise rates

Pressure at the Bank of England to curb soaring inflation mounted earlier this month, minutes of a meeting revealed, as the number of policymakers who voted in favour of an interest rate hike increased.

The January rates meeting showed that two members of the Bank’s nine-strong monetary policy committee (MPC) – Andrew Sentance and Martin Weale – voted in favour of an increase in rates from their historic low of 0.5% to 0.75%. In previous months, Mr Sentance has stood alone in calling for a quarter-point rise.

The minutes suggest the committee, which was split three ways as member Adam Posen also reiterated his vote for a second bout of quantitative easing, was becoming increasingly concerned about rising inflation after it climbed to 3.7% in December.

The details of the meeting were published a day after Bank governor Mervyn King warned inflation could rise towards 5% in coming months, but that the Bank was powerless to control the factors contributing to the inevitable squeeze on living standards.

Surging food costs and petrol prices led to the increase in the CPI rate of inflation in December, and the figures prompted warnings from economists that a rate hike was likely to come sooner than expected.

However, shock GDP figures released on Tuesday diluted this argument as the economy unexpectedly went into reverse in the last three months of 2010.

The publication of January’s minutes reveal the difficulties faced by members as they admitted that inflation had “exceeded the committee’s expectations in recent months”.

Considering the case for a rate hike, the minutes said curbing demand may help the committee hit its 2% target in the medium term.

The minutes added: “Moreover, an increase in bank rate at the current juncture might lessen the risk that a larger increase became necessary at a later stage if inflation persisted above the target.”

But considering arguments against an increase in rates, members said there were existing economic factors likely to dampen demand, such as the uncertain impact of the government’s fiscal tightening, the effect the eurozone debt crisis will have on UK exports and the reduced availability of credit.