Bank of England Meeting another indication of rate rises this year

18th June 2014

BOE Meeting Minutes – 18/06/14

The June Bank of England minutes provide an arguably rose-tinted view of the UK economy. Even though the Bank maintained its current view of 1 – 1.5 per cent of spare capacity, the view is that the broadening recovery isn’t likely to slow in the second half of the year. Forward indicators seem to support this assessment and suggest that spare capacity will be rapidly used up, leading to sooner rate hikes.

The Bank of England provided a raft of easy excuses to explain the inconsistencies in the UK economy. Low levels of inflation are regarded, not as a nagging sign of domestic economic slack, but the result of a global disinflationary environment outside of the UK’s control. Persistent weak wage growth is considered less to do with labour market slack, but a greater increase in labour market supply, or even questionable validity of the statistics. Even the recognition of a slowdown in the housing market didn’t put the Bank of England off its concern over ‘a low probability attached to a bank rate increase this year’.

The Bank of England reiterated that rate rises would be slow and gradual, but even it couldn’t deny that the future rate would move in line with economic developments. MPC members now see the gaining pace of the UK recovery as undeniable, even unstoppable, and are second-guessing their view of economic slack evident in low inflation and wage pressures.

The Bank has issued a blatant warning sign to markets that there could well be a rate rise this year and it seems more likely than ever that the first vote for higher interest rates is just around the corner.