The odds narrowed slightly yesterday that interest rates could rise more quickly than forecast after the Bank of England said inflation could stage a faster-than-expected recovery.
On the foreign exchange markets, the pound rose against the US dollar after the Bank published minutes of April’s meeting of the monetary policy committee (MPC), showing that all nine members voted to freeze rates at historic lows.
However, two members of the MPC said the decision to hold rates at 0.5 per cent, where they have been since spring 2009, was “finely balanced”.
A slump in consumer prices index (CPI) inflation, along with comments from Bank governor Mark Carney that the UK could briefly witness deflation at some point in the coming months, has dampened speculation that a rate rise is imminent.
Even with yesterday’s reading of the monetary runes, the City consensus remains that a rise is unlikely until 2016. However, economists noted the minutes saying the strength of sterling – making imported goods cheaper and therefore pushing down inflation – could be “feeding through more quickly into the CPI than expected”.
“That could mean less downward pressure on prices to come and a faster pick-up in inflation when the effects of recent falls in energy and food prices drop out of the annual comparison,” the minutes said.
The Bank’s view on the continuing surge in UK employment also appeared to take a “hawkish” tone. The MPC said it was unlikely that jobs growth could be maintained at its current pace for long “without generating greater inflation in wages and prices” unless productivity improves.
Speaking after the minutes were published, James Knightley of ING Bank said: “Were it not for election uncertainty, we think that the market would be more convincingly looking for a rate rise this year.”
Knightley added: “Should the election proceed smoothly (or more smoothly than the market is anticipating) then we suspect a November move remains a distinct possibility.”