Pound at three-year high as MPC members talk up rates rise pressure

The pound surged to a three-year high against the dollar yesterday as two members of the Bank of England's monetary policy committee hinted it is inching closer to an interest rate rise.

Charles Bean, the central bank's deputy governor, would be forced into tightening monetary policy if commodity prices continued to soar and inflation compressed its grip on the economy.

At the same time, arch hawk Andrew Sentance, who has long called for rates to rise from their historic 0.5 per cent low, warned that the MPC risked losing credibility unless it acted soon to tackle inflation, which stands at 3.7 per cent, well above the Bank's 2 per cent target.

While Sentance's comments did not come as a surprise to most economists, given that he and fellow MPC member Martin Weale voted for a rate increase last month, the comments from Bean sparked further speculation of a hike by May.

The MPC will hold its next rate-setting meeting next week but economists believe it may hang fire for another month or so until there is an improvement in GDP. The MPC faces a tough balancing act after the economy contracted 0.5 per cent in the closing three months of last year - much to the surprise of the City which was expecting about 0.4 per cent growth.

George Buckley, economist at Deutsche Bank, said: "I think (a rate rise in] February is off the cards; they're going to want to see clear evidence of an improvement in GDP.

"These are very uncertain times: the MPC will want to be sure that when they do start tightening policy, it is the right time to do it and it won't threaten the recovery."

Speaking to a regional newspaper, Bean said soaring commodity prices may force the MPC into action.

"We may well have to respond to that by keep domestically-generated inflation lower," he said.

Bean said that a spike in oil prices, which this week exceeded $100 a barrel for the first time since 2008, would not be a "nice reason" to raise rates, but the MPC would be left with very little choice if inflation became embedded.

"That certainly could be one driver of a change in interest rates if we thought it materially affected the medium-term outlook."

Meanwhile, Sentance warned that the longer a rates hike is delayed, the larger the increase in borrowing costs is likely to be when MPC members eventually press the trigger.He told another newspaper: "The longer we delay (monetary tightening] the more there is a risk that interest rate rises when they come will have to be larger, and then there will be a bigger risk of a shock to confidence.

"We need to be prepared to look through fluctuations in GDP growth when we're recovering from recession: growth figures are never linear and smooth in recoveries."

However, Bank governor Mervyn King last week warned that inflation could reach 4-5 per cent over the next few months before falling back next year.

He insisted the MPC would not be bullied into a rate rise by negative headlines on inflation.

"The headlines will inevitably focus on the immediate effect of shocks on CPI inflation rather than the outlook further ahead," King said during a speech in Newcastle. "Central banks, though, do not set policy or react according to headlines."