Expectations fall for July rate rise

The Bank of England revealed yesterday that its monetary policy committee voted unanimously to raise rates earlier this month but gave no indication that it was going to increase the cost of borrowing again next month.

The minutes of the committee's last meeting showed that the nine members all voted to increase interest rates by a quarter of a percentage point, to 4.5%.

But, unlike at the May meeting, there was no discussion of a possible half a percentage point rate rise. In fact one unnamed member said the decision between raising rates 0.25% and leaving them unchanged was "finely balanced".

The news caused a sharp movement in gilt and interest rate futures which scaled back expectations of the pace of further monetary tightening this year. Markets are now pricing in rates of up to 5.25% by the end of the year.

The rate setters decided that falling unemployment and the recovery of the world economy were exerting upward pressure on inflation. Although inflation at present is 1.5%, the MPC worried that it would go above its government-set target of 2% in two years if it did not raise rates again.

There had been speculation that the MPC might use the minutes to signal a possible rate rise next month, making three consecutive increases. It has increased borrowing costs four times since November last year.

"The next rate rise now looks as if it will arrive in August, when the MPC will once again revise their growth and inflation forecasts," said Richard Iley, an economist at BNP Paribas.

John Butler at HSBC added: "The tone of the minutes shows that the MPC is very comfortable with the market's current expectation that interest rates will rise to 5% by the end of the year."