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Bank vote leaves the door open for interest rate rise in May

The Bank of England has raised the likelihood of a May hike in interest rates after making no change at its latest meeting of the Monetary Policy Committee, which voted to hold the rate steady at 0.5%.

Two members of the nine-strong committee – Ian McCafferty and Michael Saunders – voted for an increase in rates to 0.75%.

At the last MPC meeting in February, Bank of Engliand governor Mark Carney had warned that everyone should start preparing for more rapid interest rate increases than previously signalled.

In November, the Bank raised rates to 0.5%, the first increase in a decade. The MPC reasoned that “ongoing tightening” was likely to be necessary to return inflation to the Bank's target of 2%.

On Tuesday 20th March, the Office for National Statistics announced that consumer price inflation was 2.7% in February, down from 3% the previous month and the lowest figure since July 2017.

Alan Clarke at Scotiabank said he was “more and more confident” that the MPC would raise rates in May. “Thereafter we expect a rate hike in November, but it's not going to be plain sailing getting there,” he added.

However, Samuel Tombs at Pantheon Macroeconomics suggested that the committee would wait until August to raise interest rates again.

Kamal Ahmed, economics editor at the BBC, pointed out that inflation fell more rapidly than expected earlier this week, undermining claims that price rise pressure is a present risk.

Growth is fairly weak, he observed, and “too sharp a yank on the interest rate lever could apply dampeners just when they are not needed”.

Official figures released recently show that average earnings rose by 2.6% in the three months to January – the fastest pace since 2015. On Wednesday 21 March, the government announced a 6.5% pay rise for many NHS workers over the next three years. Higher wages could make it harder for the Bank to edge inflation closer to its 2% target.

Thursday's MPC minutes said the UK economy would suffer a "temporary" hit from the recent cold weather, suggesting growth may slow to 0.3% in the first quarter, down from 0.4% for the last three months of 2017.

The National Institute of Economic and Social Research (NIESR) reaffirmed its call for a 0.25 percentage point rise every six months to bring the rate to 2% in 2020-21.


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