Inflation fear could force BoE hand on base rates

Bank of England governor Mark Carney. Picture: PA

Dissent among policymakers at the Bank of England has raised concerns about the central bank’s commitment to ultra-low interest rates.

Governor Mark Carney has embarked on a strategy of “forward guidance”, pledging to keep rates on hold until unemployment falls to 7 per cent – which is expected to take at least three years – unless there is a risk of inflation running out of control.

However, economists said rates could start rising as early as 2015 after the Bank yesterday revealed one member of its monetary policy committee (MPC) was concerned over the timing of the inflation “knockout”.

Minutes from the MPC meeting, held last week, showed members voted unanimously to keep rates at 0.5 per cent amid “encouraging” signs of growth and figures showing the eurozone improving.

Official figures published today revealed the 17-member bloc moved out of recession in the second quarter following better-than-expected growth figures in France and Germany.

Under the Bank’s policy, the unemployment link will be severed if inflation – currently at 2.8 per cent – touches 2.5 per cent or more within the next 18 to 24 months. But Martin Weale, pictured right, voiced concerns that such a long timescale could dent confidence in the Bank’s commitment to stable prices.

While the Bank said Weale was “supportive” of guidance, he voted against the initiative “to register his preference for a time horizon for the first inflation knockout that was shorter than proposed”.

Howard Archer, chief UK economist at IHS Global Insight, said: “The fact that one MPC member was openly concerned about the risk of rising inflation expectations and wanted a shorter knockout trigger may well further fuel market suspicion that the Bank will raise interest rates before mid-2016.”

Yesterday’s minutes also showed another unanimous vote to hold the Bank’s quantitative easing programme at £375 billion, although some members still saw “compelling” need for more stimulus.

Vicky Redwood, chief UK economist at Capital Economics, said the minutes would “hardly help to reassure the markets about the strength of the MPC’s commitment to keep interest rates low”, while Katie Evans at the Centre for Economics & Business Research said many observers “are clearly expecting the economy to recover more quickly than the Bank”.

The UK economy expanded by 0.6 per cent in the second quarter while the eurozone ended a record six quarters of contraction by growing 0.3 per cent in the three months to June.

Olli Rehn, the European Commission’s economic chief, said: “There is no room for any complacency whatsoever. I hope there will be no premature, self-congratulatory statements suggesting ‘the crisis is over’.

“For we all know, there are still substantial

obstacles to overcome – the growth figures remain low.”