Bank of England policymakers are divided over how far Britain’s strengthening recovery is likely to drive up prices.
The minutes of the monetary policy committee’s April meeting showed that the Bank expects that the economy grew by 1 per cent in the first three months of this year, up slightly from a previous growth forecast of 0.9 per cent.
But the nine-strong committee was unsure on how much scope Britain’s economy had to grow without generating inflation.
“There was considerable uncertainty about the amount of slack remaining within the economy and committee members had a range of opinions on this and the outlook for inflation in the medium term,” the minutes stated.
“Members of the committee held a range of views about the extent to which self- employment represented a form of labour market slack,” they added. Members of the MPC also thought it was “possible” that a sustainable rise in real wages, consistent with a durable recovery, was on the way.
The minutes noted no other differences among the MPC members, who voted unanimously to keep interest rates at a record low 0.5 per cent. Financial markets have pointed to spring 2015 as a potential time for the first rate hike.
The UK’s economy gathered pace last year, although output remains below its pre-financial crisis peak. The improvement helped Chancellor George Osborne to meet recently lowered borrowing targets, with the latest figures showing a pick up in tax receipts.
The underlying public sector net borrowing requirement, excluding financial interventions, came in at £107.7 billion in 2013-14, a fraction under the downwardly revised target contained in the Budget in mid-March. The figure is £12.1bn lower than the shortfall being predicted a year ago.
Howard Archer, chief UK economist at IHS, said that the figures were “a psychological boost for the government” and may support belief that longer-term targets can be hit.
But he added: “It will clearly need sustained improvement in growth and in the public finances before any of the credit rating agencies seriously consider upgrading their rating for the UK.”