The Bank of England has signalled that borrowing costs could start rising before the end of this year after policymakers admitted they were “surprised” that the market believed the chances of such a move were relatively low.
Economists believe the monetary policy committee (MPC) is increasingly likely to raise rates in November, when the Bank is due to publish its quarterly inflation report. Samuel Tombs of Capital Economics said: “The risk of a 2014 hike is clearly growing.”
Minutes of the MPC’s June meeting, published yesterday, showed members voted unanimously to keep the base rate at its record low of 0.5 per cent.
However, for some on the nine-strong committee, the decision had become “more balanced in the past couple of months than earlier in the year”.
Mark Carney, the Bank’s governor, noted in his Mansion House speech last week that an increase “could happen sooner than markets expect”, despite officials predicting a “modest” slowdown in economic growth during the second half of the year.
Katja Hall, the deputy director- general of the CBI, said: “It’s important that if there are any changes in monetary policy, these are clearly communicated to avoid confusion and unnecessary uncertainty.”
At the time of the latest MPC meeting, which ended on 5 June, City analysts had been expecting rates to rise in the first half of next year, with only a 15 per cent chance of it taking place by the end of 2014.
However, the Bank’s minutes said: “The relatively low probability attached to a bank rate increase this year implied by some financial market prices was somewhat surprising.”
Chris Williamson, chief economist at financial data firm Markit, said: “The conclusion we draw from this is that, if the economy continues to grow strongly in the third quarter, a rate hike by the end of the year is on the cards.
“The best guess at this stage looks to be November, as this will coincide with the new forecasts published in the Bank’s inflation report.”
A Markit survey showed yesterday that the proportion of households expecting the MPC to lift interest rates before the end of the year had doubled to 60 per cent in June, while more than a quarter believe a move could come within three months.
The publication of the MPC minutes came the day after the Office for National Statistics said inflation as measured by the consumer prices index fell to 1.5 per cent last month, its lowest level in four-and-a-half years, due in part to the supermarket price war and lower air fares.
Howard Archer, chief UK and European economist at IHS Global Insight, said: “We are increasingly leaning towards the view that the first interest rate hike from 0.5 per cent to 0.75 per cent will come in November or December, although it is far from a done deal.
“Mark Carney has stressed that the decision on when to start interest rates is not pre-set and will be data driven. Furthermore, below-target consumer price inflation and sterling’s strength gives the Bank of England leeway on when to act.”
Economists at Barclays said the City now places a 75 per cent probability of a rate hike in December, but added: “The general tone of the minutes suggests that while the committee is now viewing economic growth as being more broad-based and sustainable, a rate hike is not yet immediately warranted.”