MPC inflation fears make 2010 interest rate rise 'more likely'

THE odds on an interest rate hike before the end of the year shortened yesterday, after the Bank of England published "hawkish" minutes of its April meeting.

While all nine members of its monetary policy committee (MPC) voted to keep borrowing costs at a record low this month, policymakers voiced concerns over stubbornly high inflation levels.

The minutes were released a day after official figures revealed a bigger-than-expected rise in the consumer prices index (CPI) last month, to 3.4 per cent from 3 per cent in February.

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Although MPC members agreed recent data did not justify a significant change in their views on the outlook for the UK economy, some differences appeared to be emerging. "There was a range of views among committee members about how the balance of risks to inflation and activity had altered over the past few months," the minutes said.

Howard Archer, the chief UK economist at IHS Global Insight, the analysis and forecasting group, described the minutes as "modestly more hawkish".

"For now at least, we are retaining our view that the MPC will keep interest rates down at 0.5 per cent for many more months to come, and very possibly into 2011," he said.

"However, we acknowledge that the chances of at least a token interest rate hike in the second half of the year have increased."

ING economist James Knightley also referred to a "hawkish" tone in the minutes in relation to potential rate hikes, but argued there were still more pressing risks to economic recovery.

"We remain concerned about the potential for negative real disposable income growth this year that in our view will lead to disappointing economic performance," he said.

"We continue to favour the first rate hike coming in early 2011, rather than before year-end."

Rate-setters at the Bank, which has a 2 per cent target for CPI inflation, stressed that they would "continue to monitor developments in inflation expectations closely".

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They also voted unanimously to maintain the bank's money-boosting programme – quantitative easing – at 200 billion.

The MPC has now voted unanimously to keep monetary policy on hold for five months in a row. Its next meeting will take place after the general election, on 7 and 10 May.

April's minutes showed that many MPC members thought the immediate danger to the UK economy had fallen over the past two months.

Recently revised data showed GDP grew by 0.4 per cent in the last three months of 2009, ending an 18-month recession, and economists expect a similar rate of growth when preliminary first-quarter numbers are published tomorrow. Nonetheless, the MPC said risks remained from eurozone weakness and market worries about governments' creditworthiness.