Bank of England rate expected to remain steady

The latest Bank of England rates meeting takes place this week amid growing signs of dissent after a shock vote by one policymaker to hike borrowing costs.

Minutes of last month’s gathering by the Monetary Policy Committee (MPC) revealed a surprise seven-one split after Andrew Sentance supported a quarter point rates rise to combat stubborn inflation.

And more of his fellow rate-setters have since aired fears over persistently above-target inflation, with Adam Posen using a London speech last week to highlight the “slow upward creep” in inflation.

Economists are not expecting MPC members to vote through any rate rise when they decide on Thursday. However, the revelation of a disagreement in the June meeting is seen as significant.

The MPC had been unanimous in its decision to keep rates at their historic low of 0.5% for more than a year until last month.

The split has highlighted the threat of inflation as an increasing cause of concern among some members.

According to the recent minutes, Mr Sentance said he believed the wider economic conditions were failing to dampen inflation and that there was enough to create in the economy to absorb a rate hike.

While not convinced borrowing costs should be raised yet, other MPC experts shared his inflation worries.

David Miles told a newspaper earlier this week that UK inflation was “uncomfortably high”, although he added: “My own judgment is that we haven’t yet got to the point at which a tightening in monetary policy is the right thing to do.”

Consumer Prices Index (CPI) inflation has been above the Bank of England’s 2% target since last November, reaching 3.4% last month.

But this was down on the 3.7% seen in April and marked a bigger-than-expected fall in a sign that inflation may be at last easing back as predicted.

Government austerity measures are widely forecast to act as a further drag, while recent indications suggesting the UK economic bounce back may stall in the second half of the year would also help bring inflation back in line.

JP Morgan economist Alan Monks said: “Aside from the overtly hawkish tones of Andrew Sentance, the majority of the committee is not prepared to begin rate normalisation while current uncertainties about the growth outlook and financial markets persist.”

In fact, most economists do not expect rates to rise until at least November as the Government’s austerity Budget measures kick in.

While the MPC has remained unanimous this month on halting the £200 billion quantitative easing programme, some believe recovery wobbles could see the MPC seek to pump more cash into the system to shore up the economy.