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Wednesday, 18 July, 2001, 14:23 GMT 15:23 UK
UK rates may head higher
Interest rates have come down since the start of the year
The Bank of England has given its clearest indication yet that interest rates may start to climb again.


In the minds of some MPC members the easing cycle is close to an end

Mark Miller, Morgan Stanley
Minutes from the Bank's Monetary Policy Committee (MPC), released on Wednesday, suggest that some members are in favour of increasing rates in the near future.

The release of UK inflation data on Tuesday also diminished the chance of any further cuts to interest rates.

UK prices in June steadied at a two-year high of 2.4%, only 0.1% below the Bank of England's inflation target of 2.5%.

This means that any further moves to stimulate the economy could risk sparking an excessive rise in inflation.

Peter Luxton of Standard and Poor's said: "They're not going to be prepared to cut rates very early unless the UK economy does collapse quite sharply."

Unemployment falls

Also on Wednesday, the Office for National Statistics reported that the number of Britons out of work and claiming unemployment benefit had fallen by 12,000 in June to 963,700.

However, a 6.7% fall in vacancies posted at UK Jobcentres hinted that the unemployment figure may start to rise in the coming months.

The BBC's economics reporter Jenny Scott said that there is often a time lag between when companies begin to experience a downturn and when they cut jobs.

She pointed out that tight cashflows also encourage companies to avoid incurring redundancy costs, while there is still hope that they can ride out a slowdown.

Last month, jobless claims dropped for the eighth successive month, touching its lowest level for 25 years.

MPC minutes

The Bank of England minutes also revealed that the MPC voted eight-to-one in favour of keeping rates on hold at 5.25% during its July meeting.

"Members agreed that while there had been a considerable amount of news during the month, on balance it had not greatly altered their views on the appropriate settings of policy, although for some the news made it rather less likely that the next movement of interest rates would be down," the minutes said.

The uncertainty over the next movement in rates reflected the "dichotomy" in the economy with retail sales and the housing market surging ahead while exporters continued to struggle.

The minutes added: "The committee should monitor the situation, being prepared to adjust rates in either direction in the light of new information."

World prospects

Prospects for the world economy remained "mixed" with the United States holding up better than had been feared, but with Europe and Japan doing worse than had been expected.

The strength of the pound against the euro would continue to make life difficult for exporters, the minutes added.

Although recent inflation figures had been higher than expected, pressure on prices from seasonal foods and oil costs had begun to recede.

There was still some evidence of a "more broadly based" increase in inflation, although this may not persist, the minutes said.

Falling rates

Interest rates have come down three times since the start of the year, as the Bank of England attempts to stave off the effects of a slowdown in the global economy.

Earlier this month, the MPC left them unchanged for the second month in a row.

It last cut rates - by a quarter-point - at its meeting in May.

The MPC minutes held few surprises for analysts.


They're not going to be prepared to cut rates very early unless the UK economy does collapse quite sharply

Peter Luxton, S&P
Mark Miller, of Morgan Stanley, said: "They're pretty hawkish sounding minutes, in itself not surprising after the inflation numbers in May and also strong retail sales data recently.

"In the minds of some MPC members the easing cycle is close to an end, but I think with the global economy still slowing down the jury is still out on this particular score."

Analysts also welcomed a slowdown in wage inflation, with the headline rate of average earnings falling slightly in May to 4.8%.

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See also:

18 Jul 01 | Business
UK jobless total falls again
17 Jul 01 | Business
UK inflation stays at two-year high
05 Jul 01 | Business
UK interest rates unchanged
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UK and euro rate decisions loom
04 Jul 01 | Business
Bank weighs two-speed economy
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More signs of manufacturing gloom
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Bank warns on slowdown
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