Some Bank of England policymakers think the case for
raising interest rates is becoming stronger as Britain's
economy gets closer to operating at full steam, minutes
of their last meeting showed on Wednesday.
"For some members, the monetary policy decision was becoming more
balanced," the minutes for May 7-8 said.
"In terms of the immediate policy decision, however, all members
agreed ... it would be necessary to see more evidence of slack
reducing before an increase in Bank Rate would be warranted," the
BoE Governor Mark Carney said last week that the economy had "edged
closer" to the time when the central bank would need to raise
Figures on Wednesday, for example, showed retail sales jumped by
their biggest amount since May 2004 - aided in part by a late
"The debate is clearly shifting in favor of moving rates in the not
too distant future," said George Buckley, UK economist at Deutsche
Sterling hit a 5-1/2 year high on a trade-weighted basis after the
BoE minutes and the retail data, and British government bond prices
fell. This caused the premium that 10-year gilts offer over German
government bonds to spike around 3 basis points to 128.8 basis
points - its highest since the third quarter of 1998.
There is increasing concern at the bank and elsewhere that British
house prices are rising too far too fast. The bank said low rates
could distort the property market.
House prices are up almost 10 percent nationally in the year to
date, and on Tuesday Lloyds Banking Group <LLOY.L> said it would
stop lending at multiples above four times a borrower's income for
mortgages of over 500,000 pounds ($842,400) in order to reduce its
exposure to London, where prices are rising fastest.
The BoE said that its Financial Policy Committee could tackle the
housing issue when it meets next month, and that the decision on
when to raise interest rates would be driven by a judgement on how
much spare capacity remained in Britain's economy, which is growing
at its fastest pace in years.
BoE forecasts last week showed that a rate rise in around a year
would be consistent with keeping inflation just below the central
bank's 2 percent target.
But some economists expect a minority of MPC members to start voting
for a rate rise soon, and Wednesday's minutes suggest this could be
on its way.
Adding to the mix, three new policymakers will join the Monetary
Policy Committee in the next three months - Andy Haldane, currently
the BoE's executive director for financial stability, former White
House adviser and U.S. academic Kristin Forbes and Nemat Shafik from
the International Monetary Fund.
The BoE reiterated that it would only raise rates gradually, and to
a level that was lower than before the financial crisis, but some
policymakers saw this as a reason to raise rates sooner rather than
"It could be argued that the more gradual the intended rise in Bank
Rate, the earlier it might be necessary to start tightening policy,"
the minutes said.
On the other hand, a premature rate rise could choke off growth,
They also remain divided on how much slack is in Britain's economy,
and how fast it will be eroded as growth continues, the minutes
Although Britain's economy is still slightly smaller than before the
financial crisis, the BoE forecasts it will grow by 3.4 percent this
year, which would be its fastest rate of growth since 2007.
Wednesday's retail sales data suggest growth is in full swing.
Retail sales in April jumped by 6.9 percent on the year, the
strongest growth since May 2004, and annual sales growth in the
three months to April matched February's rate of 4.6 percent, the
fastest since January 2012.
"These data support our forecasts for above consensus growth and a
first rate hike coming in Q1 2015. We see a 35 percent chance that
the BoE hikes in Q4 2014," said Rob Wood, UK economist at Berenberg
(Additional reporting by Belinda Goldsmith and Ana Nicolaci da Costa
Editing by Jeremy Gaunt)