MPC edges closer to interest rate rise as two members vote for hike

31 January 2011 | By Natalie Thomas

The Bank of England edged a step closer to increasing interest rates in January, minutes from the Mone-tary Policy Committee’s meeting show.

Two members of the MPC voted for a rate rise at January’s meeting. Andrew Sentance and Martin Weale both opted for a 0.25% increase in interest rates to 0.75%.

In previous meetings Sentance was the only member who called for a quarter point increase.

Adam Posen was the sole mem-ber who voted to boost the size of the asset purchase programme. He called for a rise of £50bn to a total of £250bn.

The MPC has kept rates at 0.5% since March 2009.

Sentence and Weale cited the rise in inflation and its medium-term outlook as reasons to increase rates after inflation jumped to 3.7% in December.

Posen says the balance of risks to inflation continued to warrant an expansion of the MPC’s programme of asset purchases as it was likely that inflation would fall below the target in the medium term.

Last week, figures from the Office for National Statistics revealed the economy suffered a 0.5% quarterly drop in Q4 2010.

The drop follows growth of 1.1% in Q2 of 2010 and 0.7% in Q3.

Vicky Redwood, senior UK economist at Capital Economics, says: “January’s MPC minutes suggest it was edging closer to a near-term rate hike. But gross domestic product figures could dissuade the waverers from rushing into a premature policy-tightening. Some members are still convinced that policy should not be tightened.”

Julien Holmes, chief operations officer of Crown Mortgage Management, says: “Growth is fragile at the moment but low rates could do just as much to reduce the GDP as higher ones.”

Holmes says fears about over-inflation and declining living standards are at the core of many consumers’ concerns about the economy, so tackling inflation must be the number one goal.

He adds: “The latest growth figures were heavily influenced by the snow and to suggest that a weather-related drop has left the economy on the brink of a double dip is melodramatic.”

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