Bank of England tipped to hold interest rate despite growing divide in MPC

Published on Thursday 3 February 2011 12:22

THE Bank of England is this week tipped to keep interest rates on hold but further members of the nine-strong monetary policy committee are expected to join arch hawk Andrew Sentance in backing a hike.

Sentance, who has long called for interest rates to rise from 0.5 per cent to calm Britain's swelling inflation problem, was supported by Martin Weale in voting for a tightening of monetary policy at last month's MPC meeting.

Economists expect at least one other member to be persuaded over to the hawks' camp after the Bank's deputy governor Charles Bean last week said it would be forced into action if commodity prices continued their upward spiral and inflation became embedded in the economy.

Although this week's meeting is expected to bring no change, the odds are shortening on an interest rate rise before May. Howard Archer, chief UK economist at IHS Global Insight, has also warned that a move next week cannot be ruled out.

"There is now major uncertainty over interest rate prospects in both the very near term and further out," he said.

"The Bank of England's monetary policy committee is currently negotiating a tortuous path between high and rising consumer price inflation on one side and faltering economic activity and serious growth headwinds on the other.

"We believe the odds still significantly favour the Bank… holding fire on interest rates in the very near term. Nevertheless, it is far from inconceivable that it could raise interest rates at the conclusion of the MPC's February meeting (on Thursday]."

Chris Williamson, chief economist at Markit, said last week's positive Purchasing Managers Index (PMI) surveys, particularly for Britain's dominant services sector, had once again raised expectations of a near-term rate rise.The relatively healthy surveys suggested confidence that the economy could now withstand a change in the cost of borrowing after the 0.5 per cent GDP contraction in the fourth quarter of last year.

"The shock 0.5 per cent contraction of GDP in Q4 has caused analysts to rein in their expectations of a rate hike, but a more recent bounce-back in the Markit/CIPS (Chartered Institute of Purchasing and Supply] PMIs for January may have put a rate rise back on the table," Williamson said.

The MPC is coming under pressure over inflation, which at 3.7 per cent stands well above the Bank's 2 per cent target.

Sentance last week warned that the MPC risked losing credibility over its ability to control inflation, with the cost of living expected to soar to as much as 5 per cent over the next few months.

However Sentance and other hawks are likely to face opposition from Bank governor Mervyn King who has warned he will not be beaten into a rate rise by headlines screaming about inflation.

Last month he told an audience in Newcastle that the MPC's role was to concentrate on the "outlook further ahead" and that central banks "do not set policy or react according to headlines".