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Policy makers of the Bank of England was not unanimous in holding interest rate at a historic low in August, the minutes of the meeting showed Wednesday. For the third straight month, Andrew Sentance was the lone member arguing for a rate hike.
Other eight members of the Monetary Policy Committee, or MPC, including Governor Mervyn King, voted to maintain the interest rate at 0.5%, while Sentance sought a 25 basis point hike. Policy makers also decided to maintain the level of quantitative easing at GBP 200 billion.
According to Sentance, economic conditions had improved over the last twelve months and the inflation outlook had shifted sufficiently to justify beginning to hike interest rates gradually. "For one member, the balance of risks was such that it was appropriate to start to withdraw some of the exceptional monetary stimulus provided by the easing in policy in late 2008 and 2009," the minutes showed.
In the August meeting, there were arguments in favour of a further easing in monetary policy stance, a "small increase" in Bank Rate and also arguments for maintaining the stance of policy. The meeting held on August 4 and 5 had nine members as Martin Weale assumed office, succeeding Kate Barker.
A further policy loosening is likely, perhaps at the start of next year, said Vicky Redwood at Capital Economics. At the very least, interest rates are going nowhere for a long time, the economist added.
The MPC considered arguments in favor of a further easing as credit conditions seemed set to remain somewhat tighter for longer than expected at the time of the May Inflation Report. Most members assessed that the margin of spare capacity will bear down on inflation and bring it back to target in the medium term.
Most members thought that the current level of Bank rate and stock of asset purchases financed by the issuance of central bank reserves remained appropriate to balance the risks to the inflation outlook in the medium term. These members stood ready to respond in either direction as the balance of risks evolved.
"Given growth is going to slow due to the severity of the UK's fiscal austerity package and with lead indicators and consumer confidence already softening, we doubt the BoE will look to raise rates until next year at the earliest," ING Bank NV's James Knightley said.
As consumer price annual inflation exceeded the 2% target by one full percentage point for three straight months in July after the previous breach, King wrote an open letter to the Chancellor. Inflation had slowed slightly in July to 3.1% from 3.2%. In the August Inflation Report, the central bank had projected inflation to remain above the 2% target for longer than judged likely in May, largely reflecting the hike in the rate of value added tax in 2011.
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