Pressure grows for interest rate increase

The Bank of England revealed today that in the January meeting of its Monetary Policy Committee, two members voted for an interest rate increase of 0.25%.

The minutes, released today, said: “For two members, the evidence suggested that the balance of risks was already sufficiently clear to warrant an immediate increase in Bank Rate.

“The continued elevated rate of inflation, which was forecast to persist, posed a significant risk to inflation expectations and hence to the medium-term
outlook for inflation. This made more powerful the case which had been building for some time for a gradual rise in Bank Rate.”

This highlights the dilemma the Bank of England faces. Inflation has been way above its targeted 2% for over a year and is unlikely to fall soon, while economic growth is sluggish at best.

An interest rate increase could be needed to stave off the threat of even higher inflation but it could also hit the economy at a time when its recovery seems to have stopped dead. Higher interest rates would hit the housing market particularly hard.

There appears to be a split within the committee, as one member actually voted to continue the economic stimulus and increase the bank’s quantitative easing policy from £200bn to £250bn.

Commenting on the minutes, RICS chief economist Simon Rubinsohn said: “The minutes of the MPC meeting demonstrate the dilemma facing the authorities as inflation approaches the 4% mark, with the split between the economics hawks and doves becoming more pronounced.

“A rate hike over the coming months would clearly be bad news for the housing market but even without an officially sanctioned move, actual mortgage costs are already beginning to creep up reflecting developments in financial markets. Against this backdrop, housing transactions are likely to remain weak over the coming months.”