Pressure grows for interest rate increase Go compare with our comparison table

Pressure grows for interest rate increase

23 February 2011 / by Paul Dicken

Three members of the Bank of England Monetary Policy Committee voted to increase interest rates in the committee’s meeting in February.

Although the majority of committee members preferred keeping the Bank Rate at 0.5 per cent, two members, Spencer Dale and Martin Weale, called for an increase of 0.25 per cent, while long time advocate of rate rises Andrew Sentance pushed for an increase of 0.5 per cent.

If the rate increase proponents had won out, the Bank Rate in February could have gone up to 0.75 per cent, or one per cent in Sentance’s preferred scenario.


The minutes from the meeting held on 9 and 10 February said: “Much of the rise in global inflation had reflected a rise in commodity prices, many of which had increased by around 50% since the middle of 2010.” In Janaury the Consumer Prices Index (CPI) hit four per cent.

While the depreciation in the value of sterling has helped British exporters, import prices have climbed upwards on the back of rising global prices.

There was a ‘wider than usual range of views’ on the outlook for inflation in the medium term, with the committee expected CPI level to be between four and five per cent in 2011.

But the minutes continued, “During 2012, inflation was likely to fall back as those effects [commodity and imported goods and services] waned and the downward pressure on wages and prices from the margin of spare capacity persisted.”

Although inflation expectations have not materially changed, if CPI rate remains significantly above target for an extended period there is a risk that people will expect higher inflation, adding upward pressure to price levels.

UK economy

The minutes discussed the effect of the heavy snowfalls in December on growth:  “Even without the effects of the snow, the ONS had estimated that the economy slowed sharply in the fourth quarter. And early indicators suggested that, stripping out the effects of the bounce back from the snow-affected levels of activity in December, underlying growth in the first quarter could also be weak.”

The minutes said: “For three members, the case for removing some monetary stimulus at this meeting was compelling. For those members, the upside risk to the medium-term inflation outlook from global inflationary pressures and the possibility that inflation expectations would move up outweighed the downside risks to inflation”.

Members of the committee not favouring a rate rise did believe the strength of the case for increase had grown, but the minutes added: “Given the potentially disruptive impact of reversing any immediate change in Bank Rate, there was merit in waiting to see indicators of how the economy performed at the start of the year to help assess whether or not the decline in GDP in the fourth quarter presaged sustained economic weakness.

“A rise at this juncture could damage household and consumer confidence, which remained fragile.”

In line with that view, one member of the committee, Adam Posen, called for more economic stimulus measures, increasing the asset purchase programme (known as quantitative easing) which helps put money into the financial system.

However, the majority of members opted to keep quantitative easing at its current level.

© Fair Investment Company Ltd

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