Interest rates rise looking more likely as MPC split widens

THE odds narrowed on an early interest rate rise yesterday as a third member of the Bank of England's monetary policy committee backed an increase.

Spencer Dale joined Andrew Sentance and Martin Weale urging early action to raise the rate from its historic low.

The emergence of a widening gulf on the MPC came ahead of a speech last night by one member cautioning against hasty moves.

David Miles, in a speech to a City audience, warned against "showing how tough on inflation one is with a tightening in policy on a scale which the assessed profile for inflation and growth do not warrant".

City analysts said the latest developments showed the deepening rift within the MPC on how quickly to increase base rates after two years of being pegged at 0.5 per cent.

The minutes of the committee meeting on 9 and 10 February showed Spencer Dale, the BoE's chief economist, joined Sentance and Weale in voting for higher rates to combat chronic inflation, giving a 6-3 vote against a 7-2 vote at the January meeting.

City analysts noted it was the first time a BoE insider on the MPC had sided with dissenting external members in arguing the need for a rate cut.

In addition, Sentance, the first MPC member to argue for a rate rise last year, upped his previous call for a 0.25 per cent increase in base rates to a 0.5 per cent hike. Dale and Weale voted for a 0.25 per cent rise.

Howard Archer, chief UK economist at IHS Global Insight, said: "The hawks within the MPC are growing in numbers and gaining ground, with an interest rate hike looking ever more likely within the next few months."

He said it was "particularly significant" that Spencer had joined the rate dissidents. "Not only does it mean that three MPC members now favour an interest rate hike, but it means that there is now a split within the internal Bank of England members on the MPC," Archer said.

Mervyn King, Governor of the BoE had said at the publication of last month's quarterly inflation report that the MPC was "unusually divided".

But he said the current exceptional macro-economic circumstances, with big oil and commodity price increases and a hike in VAT, were likely to provoke contrasting views on rates.

Critics have claimed King has not done enough to tame inflation, although supporters maintain factors such as VAT and surging prices in the likes of cotton, wheat and heavy metals are not within his control. Miles yesterday said it was a wonder inflation was not even higher than 4 per cent, given Britain's reliance on imported commodities and the recent increase in VAT.

He said that "if shocks from changes in VAT, energy prices, and import prices had hit us in normal circumstances, inflation might well have climbed to 6 or 7 per cent over the past year".

Strong purchasing managers' surveys this year suggest Britain's economy is back on track for recovery after a snow-related blip at the end of last year. This could allow firms to pass on rising input costs and drive up inflation.

"Of those members not favouring a rise in Bank rate, some thought that the case for an increase had nevertheless grown in strength," the BoE minutes acknowledged.

The BoE expects inflation to remain above target until the end of 2012 and fall below 2 per cent thereafter, if interest rates rise as markets expect. Money markets are pricing in a quarter-point increase in borrowing costs by May, with rates hitting 1.25 per cent by the end of this year.