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Rate rise 'unlikely but possible'

Published On 5 February 2007 at 11:18:51

It is unlikely that the Bank of England (BoE) will raise interest rates this week, although it remains possible that it will do, financial analysts predict.

Global Insight states that it is "somewhat unlikely" the bank's monetary policy committee (MPC) will move rates to 5.5 per cent this month, although given January's shock rise notes that it cannot be ruled out.

Inflation is way above target at three per cent, making a further rate rise "very possible". However, Global Insight notes that other factors could induce this to fall without an interest rate adjustment.

It reminds people that BoE governor Mervyn King recently said that the MPC believes inflation will fall back, "possibly quite sharply", in the second half of the year.

Moreover, Mr King has previously stated that it is necessary to wait until Easter to get a full picture of Christmas and new year spending.

However, Incomes Data Services reported that median pay settlements reached 3.5 per cent in the three months to December, meaning the MPC may feel it is necessary to take early action to stop this rising further.

Nevertheless, Global Insight adds that pay awards are expected to be more modest in 2007, while there is sufficient slack in the labour market to limit bargaining power, concluding that the bank would need evidence of some "alarmingly high pay settlements" to enact another rise.

Additionally, Global Insight points out that four of the MPC's nine members voted against a rate rise last month, making it "somewhat unlikely" that a majority will be inclined to increase rates again so soon.

But, with January's decision coming as a shock, Global Insight adds that is "certainly not going to rule out an interest rate hike on Thursday".

"There is a very real risk that interest rates could go higher still," it concludes.

 

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