Deputy governor of the Bank of England Rachel Lomax joined fellow Monetary Policy Committee member David Blanchflower in calling for interest rates to be held this month, a surprise move that suggests momentum for further rate hikes is waning.
The minutes of this month’s meeting, at which the MPC opted to hike rates by 0.25 percentage points, to 5 per cent, showed a 7-2 vote for the increase, with Bank insider Ms Lomax, and Mr Blanchflower calling for a pause.
George Buckley, chief UK economist at Deutsche Bank, said: “Ms Lomax had in the past on two occasions voted in favour of tighter policy than the Committee, but never for more lax policy until this month.”
Mr Blanchflower emphasised the extent of spare capacity in the economy while Ms Lomax focused on the danger of a slowdown in the world economy, on the back of a weaker US.
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Howard Archer, chief UK economist at Global Insight, said: “It is a surprise that Rachel Lomax joined David Blanchflower ... Blanchflower was clearly always going to be a dissenter, given his belief that there is ample spare capacity in the economy, but we had thought he would be the only one.”
Economists now widely expect rates to be held at 5 per cent for some months after last week’s Inflation Report suggested that the Bank of England is more at ease with inflation prospects.
In the minutes, arguments for keeping rates on hold also included a slack labour market and the view that inflation was being stocked by high energy prices and would fall back when these dissipated.
However, the majority thought a hike was necessary, given the balance of risks, to bring consumer price inflation back towards the Bank’s 2 per cent target.
In the year September, CPI inflation stood at 2.4 per cent. Last week’s Inflation Report suggested that the Bank expects inflation to rise further in the near-term before easing back towards the target.
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As widely expected, the minutes also suggested that upcoming wage settlements will play a key role in the future course of interest rates.
Mr Archer said: “Given that many wage agreements are still linked to RPI inflation and this reached an 8-year high of 3.7 per cent in October and could well reach 4 per cent by the end of the year, there is a clear risk that the early 2007 pay settlements could be significantly higher.
“If wages do show signs of moving up markedly, the Bank of England is highly likely to react by pushing up interest rates further.”