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Bank of England raised rates to avoid more brutal hike: minutes

The rate-setting Monetary Policy Committee (MPC) voted 6-1 to lift the central bank’s key “repo” rate -- the rate at which it lends to commercial banks -- by a quarter-point, minutes of their most recent meeting showed.

The vote on August 3 led to the first interest rate hike in two years as the Bank of England sought to control inflation and dampen economic growth.

Analysts, who were mostly caught out by the surprise hike, had predicted a less convincing majority vote of 5-2.

According to the minutes, those in favour of a hike had argued that “an early increase in rates would reduce the risk that a sharper rise would be needed later”.

The minutes also showed that the MPC expected inflation “to rise further above target in the next few months”.

“The committee concluded that it was most likely that interest rates needed to rise in order to bring inflation back to target in the medium term,” the minutes said.

The Bank of England is tasked by Prime Minister Tony Blair’s Labour government with keeping annual inflation within 1.0 percentage point either side of a 2.0-percent target.

“The committee did not give any impression that it envisaged needing to raise rates aggressively over the coming months,” said Investec analyst Philip Shaw. “We stand by our November hike call and that 5.0 percent will prove to be the peak.”

MPC member David Blanchflower was the only voice calling for the cost of borrowing to remain on hold. He agreed with the need for a hike, but was concerned over the timing.

Standard Chartered economist Gavin Redknap added: “We expect the bank to raise rates to 5.0 percent by November, but still look for lower rates next year as the domestic and global economies slow.”

British 12-month inflation eased slightly to 2.4 percent in July, from a nine-month peak of 2.5 percent in June.

In the minutes, the BoE repeated its view that recent rises in domestic energy costs and the impact of increased university education feed would push inflation further above target “in the next few months”.

BoE governor Mervyn King had said last week that there was a 50-50 chance that inflation would rise above 3.0 percent over the next six months.

In July, the MPC had voted 7-0 to keep interest rates on hold, which had marked the first unanimous decision since November 2005, despite above-target inflation and faster economic growth.