Bank tipped to raise rates again

The Bank of England's monetary policy committee voted unanimously to raise interest rates by a quarter point to 4.25% earlier this month but also discussed a half-point increase, minutes showed today.

The fact that the nine committee members considered a more aggressive move immediately sparked speculation that the Bank might raise interest rates again next month.

"This is consistent with the hawkish inflation report last week, and it is fairly clear that the MPC judged that the stance of monetary policy is out of kilter with meeting the inflation target further ahead," Philip Shaw at Investec told Reuters.

"A 25 basis point increase in base rates looks likely in June and again later in the summer."

The MPC has so far pursued a "gradualist" policy on interest rates. Since November it has raised rates three times, at two-monthly intervals.

A decision to push rates up in June would be seen as a move towards a more aggressive approach.

Although inflation is currently only at 1.2% - well below its 2% target - the Bank, in its minutes and last week's inflation report, has expressed concern that prices will move above target in two years' time because of a stronger economy.

"The forecast suggested that interest rates might need to rise more rapidly at some point than currently expected by the market," the minutes said.

"A 50 basis point rise could therefore be warranted by the committee's central projection."

Rising oil prices were also a factor. The Bank said the increase, of about 25% since the start of the year, might persist because of an upturn in the global economy in general and strong demand from China in particular.

The Bank noted that oil futures prices for a year ahead were 15% higher than at the time of the February inflation report.

Oil prices are at their highest since the start of the 1991 Gulf war, with light US crude nearing $42 (?24) a barrel.

The Bank said utility and petrol prices were expected to exert upward pressure on inflation over the next few months.

City analysts expect interest rates to rise to around 5% by the end of the year, but the Bank has raised the prospect of higher rates in order to hit its inflation target in its two-year horizon.

"If interest rates increased broadly in line with market expectations, inflation would be rising towards and then above target in the second year of the forecast period," the minutes stated.

The MPC said there was less justification for being cautious in raising interest rates than in November, when it began its tightening cycle, but the element of uncertainty over the effect of higher borrowing costs still had to be borne in mind.

The Bank stressed that in raising rates it was not targeting house price inflation as such but said it had to weigh its impact on the economy.

"The significance of the unexpected acceleration in house prices was that it supported a stronger short-term outlook for consumption and output growth and hence a steeper projected rise in inflation," the Bank said.