May interest rate rise on the cards

May interest rate rise on the cards

An interest rate rise in May looked more likely after minutes today revealed that two Bank of England policy-makers voted in favour of an increase earlier this month.

At the meeting on March 9 and 10 of the Bank's monetary policy committee (MPC), Paul Tucker, who oversees market trading operations at the Bank, and the deputy governor, Sir Andrew Large, broke ranks to vote for a quarter-point increase.

Analysts had expected the vote to be 8-1 against a rise, amid expectations that Mr Tucker alone would vote for a hike, as was the case in February. In the event, the MPC voted 7-2 to hold rates at 4.75% for the seventh month running.

"Little has happened since the March MPC meeting that is likely to influence any of the members conclusively one way or another ... Consequently, the MPC seem unlikely to act in April, although we continue to believe that a 25-basis point hike could occur in May," said Howard Archer, the chief UK economist at Global Insight, the consultancy.

The two MPC members who wanted a rate rise in March argued "a modest rise in interest rates now would help to pre-empt inflationary pressures, and an increase in interest rates would not be a major surprise", the minutes said.

But for most members, little had changed since the February meeting.

"The two key risks discussed last month had neither crystallised nor clearly diminished," the minutes said.

Household spending was the first key risk, the Bank.....continued below

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said. It said that, if consumer spending was fragile, a rise in interest rates could dent it further. Official figures today underlined those concerns.

While the Office for National Statistics left its 0.7% estimate of economic growth in the fourth quarter unchanged, as expected, it revised the rise in household spending to just 0.2%, half the rate published last month.

That was the weakest rate since the first quarter of 2003, when consumer confidence suffered in the run-up to the Iraq war. Meanwhile, manufacturers have reined back their output expectations in the face of subdued demand, according to the Confederation of British Industry's monthly industrial trends survey.

The CBI said the strong output expectations of the February survey had been disappointed as manufacturers had now scaled back their forecasts.

On the other side of the ledger, the Bank said a second important risk concerned how rapidly consumer prices would respond to demand and cost pressures amid a tight labour market and rising factory gate prices.

Inflation remained at a two-year high of 1.6% for a third month in February, the ONS said yesterday, despite higher oil prices. Economists are predicting a pick-up to 1.7%, still below the Bank's 2% target.

As for the March vote, the minutes said that for most members "the balance of risks to the inflation forecast remained sufficiently to the downside in the near term to justify maintaining the bank's ... rate at its current level".

After raising its interest rate five times between November 2003 and August 2004 to contain inflation, the MPC was until last month unanimous in keeping rates unchanged.

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