‘Material spread’ of views at Bank on rate rise question

The debate about when to raise interest rates seems to have heated up within the Bank of England’s rate setting committee.

Minutes from the Monetary Policy Committee’s latest meeting claim there was a “material spread of views” on the outlook for the economy and, therefore, the path of interest rates.

Ian McCafferty and Martin Weale voted against to increase the bank rate by 25 basis points but the majority of seven members voted to maintain rates at their current levels.

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“There was a risk that growth might soften further than anticipated and that inflation might persist below the target for longer than expected,” the minutes said.

“In that case a premature tightening in policy would leave the economy vulnerable to shocks, with the scope for any stimulus that subsequently became necessary being limited by the effective lower bound on interest rates.

“Against this, however, there was also a risk that the degree of spare capacity would be eliminated more quickly than assumed in the November report’s central projections, were the Bank Rate to follow the path implied by market yields.

“That would potentially result in inflation rising to, and subsequently overshooting, the 2 per cent target. Individual members ascribed materially different probabilities to these risks.”

The committee noted the past few months had seen global growth slow, claiming the outlook “had weakened, especially in the euro area”.

“At the same time, there had been significant falls in longer-term international risk-free interest rates,” the minutes said.

“A possible explanation was that these reflected an increased recognition over the course of the year among market participants that the global recovery from the financial crisis might be more protracted and bumpy than previously supposed.

“On balance, taken together with the stimulatory policy actions taken during the month by some central banks overseas, the Committee’s judgement was that this movement in market yields would partly ameliorate the softening of global activity growth.”

The Committee recommended the Bank’s asset purchase scheme remain at £375bn.