Bank 'dove' open to more rate rises

The Bank of England may have to raise interest rates again, but borrowing costs are near their peak, a member of the Bank's monetary policy committee (MPC) was quoted as saying today.

In an interview with Belfast newspaper the Irish News, Kate Barker, one of the Bank's most dovish members on interest rates, said: "The fundamental point isn't so much whether there is another quarter point or so to go but that the peak in the cycle may not be very much higher."

Ms Barker hinted that the MPC considered raising rates at the February meeting, as the Bank's new central projection for inflation was above its 2% target in its two- and three-year horizon.

"If you look at the forecast for inflation at face value you'd wonder why we hadn't thought about putting rates up because inflation is clearly above the target at the horizon," Ms Barker told the paper.

She said the main reason the MPC did not raise rates last time "was uncertainty about short term trends in the economy".

Earlier this month, the MPC left rates unchanged at 4.75% for the sixth month in a row. Analysts are divided as to whether the MPC will raise rates again, although the consensus is that borrowing costs are near their peak.

Analysts said it was notable that Ms Barker, one of probably two or three members who are seen as arch doves on the MPC, seemed open to the possibility of one or more rate rises.

"Overall this seems interesting primarily because someone regarded as a dove is open to more rate hikes. Over the next three days we get more insight into the MPC's thoughts (with several speeches from MPC members). These comments raise the possibility that they use this opportunity to switch to a more hawkish tone. We still expect interest rates in the UK will peak at 5.25%," said John Butler, chief UK economist with HSBC.

Ms Barker also said that policymakers were surprised by how strong the housing market had remained, as it had performed better than they had expected in November. Ms Barker suggested that the housing market could prove stronger than the Bank's 2005 forecasts.

"It's very difficult to tell what is going to happen (to the housing market) going into next year. In some senses that could be an upside risk," Ms Barker told the Irish News.

Ms Baker said the fears of a year ago that interest rates would go much higher had proved unfounded.

"Not much has happened in the last year," she said. "Growth in the economy has been around trend, consumer spending has been around trend. Wage growth hasn't taken off in the way we thought. It's actually been a pretty stable year."