Talking Point: Interest rates

Written by on 27 May 2014

Some Bank of England (BoE) policymakers think the case for raising interest rates is becoming stronger as Britain’s economy gets closer to operating at full steam, minutes of their last meeting, published last Wednesday, showed.

“For some members, the monetary policy decision was becoming more balanced,” the minutes for May 7-8 said.

“In terms of the immediate policy decision, however, all members agreed it would be necessary to see more evidence of slack reducing before an increase in bank rate would be warranted.”

BoE Governor Mark Carney said earlier this month that the economy had “edged close” to the time when the central bank would need to raise interest rates.

For example, retail sales have jumped by their biggest amount since May 2004.

“The debate is clearly shifting in favour of moving rates in the not too distant future,” George Buckley, UK economist at Deutsche Bank, told Reuters.

There is increasing concern at the bank and elsewhere that British house prices are rising too far, too fast. The bank said low rates could distort the property market.

House prices are up almost 10 per cent nationally in the year to date, and last Tuesday Lloyds Banking Group said it would stop lending at multiples above four times a borrower’s income for mortgages of over £500,000 in order to reduce its exposure to London, where prices are rising fastest.

The BoE said that its Financial Policy Committee could tackle the housing issue when it meets next month, and that the decision on when to raise interest rates would be driven by a judgement on how much spare capacity remained in Britain’s economy, which is growing at its fastest pace in years.

BoE forecasts last week showed that a rate rise in around a year would be consistent with keeping inflation just below the central bank’s 2 per cent target. But some economists expect a minority of MPC members to start voting for a rate rise soon, and last week’s minutes suggest this could be on its way.

Adding to the mix, three new policymakers will join the Monetary Policy Committee in the next three months.

They are Andy Haldane, currently the BoE’s executive director for financial stability, former White House adviser and US academic Kristin Forbes and Nemat Shafik from the International Monetary Fund.  

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