All nine members of the Bank of England's Monetary Policy Committee voted for this month's quarter-point rise in interest rates to 4.5 percent, minutes of their June 9 and 10 meeting showed on Wednesday. The decision to raise borrowing costs by a quarter-point for the second month in a row appears to have been fairly clear-cut for most of the MPC, who had thought that their inflation forecasts could have even warranted a half-point rate rise the month before. But the June decision remained "finely balanced" for one member, who nevertheless still reckoned that a rate rise this month was consistent with the path of interest rates set out in the BoE's market rate projection published in May. There was little to suggest that the MPC was poised to raise borrowing costs again, and gilts and interest rate futures immediately shot up after the minutes were published. "This confirms our view that the MPC is probably going to be happy to sit on its hands until August," said Alan Castle, UK economist at Lehman Brothers. Markets are pricing in anything up to a full percentage point of monetary tightening by the end of the year, to add to the four quarter-point rate rises the MPC has put in place since November.
DEBT STILL A WORRY
Some MPC members are clearly concerned that household debt levels are still rising too fast and increasing the risks to economic stability further out. "A further increase in interest rates now might encourage a more prudent approach towards incurring higher levels of prospective debt servicing, so helping to contain the vulnerability of demand to subsequent shocks," the minutes said. The news since May, the minutes noted, had on balance suggested stronger external demand and inflation. The euro zone was looking stronger while recovery in the United States and Asia was more firmly established. Oil prices, which had risen sharply so far in 2004, were expected to have only a modest impact on the British economy, the MPC noted.
And while house price inflation had turned out stronger than expected, there were some tentative signs of it easing. Labour market conditions, however, were tightening, with both employment and earnings picking up. The MPC also considered arguments for keeping rates unchanged before opting for the move. They were: to wait for revisions to the UK first-quarter growth figures; the possibility of downside risks to the outlook, three previous rate rises still had not taken their full effect; higher oil prices and geopolitical risks to confidence. "Consumer confidence, the housing market and the manufacturing sector could all turn out to be more fragile than the MPC currently believed," the minutes said.///