MPC split on rate rise

The MPC meets monthly to consider interest rates

The Bank of England's Monetary Policy Committee was split on whether to raise interest rates this month.

The minutes of the meeting on 6th and 7th June of the Committee show that three members of nine-member committee wanted to raise interest rates by 0.25%.

The 6-3 vote makes it more likely that there will be further interest rate rises later in the year.

The pound rose on the news, which had not been expected by analysts.

"I'm surprised. I thought it was going to be a 9-0 vote again," said Malcolm Roberts of Crossboarder Capital.

The three members who voted for a rate rise include the Deputy Governor of the Bank of England, Mervyn King, and its chief economist, John Vickers, as well as one of the new independent members, Professor Stephen Nickell.

Worries about sterling

The main uncertainty, according to the Bank, centred on what was likely to happen to the exchange rate.

Sterling has fallen in the last month from its historic highs, but has still been much stronger than for some years.

A further fall in sterling would boost inflation by making imported goods more expensive.

"The overall effect of the exchange rate depreciation on inflation was highly uncertain," the Bank minutes said.

"While the depreciation would, other things being equal, lead to higher inflation looking out, inflation was still below target and likely to be so for some time.

"There was no need for a rise in interest rates this month and for some members, no presumption that a further rise would be needed," it added.

The Bank was also encouraged by the fall in average earnings growth.

And it noted that some other signs that inflationary pressures may be weakening.

The economy grew by less than expected in the first quarter of the year, retail sales were weaker than expected, and house price inflation may be slowing.

However, some members warned that domestic demand in the UK economy was still likely to grow too fast without further rate rises.

And they warned that, with a tight labour market, pressure on earnings was likely to grow.

Rebalancing the economy

The Bank was hopeful that the change in the exchange rate might contribute to a rebalancing of the economy, with a slowdown in the service sector and an increase in the output of the export-oriented manufacturing sector.

But it accepted that its interest rate policy was now hostage to developments in the United States and Europe, where the central banks have raised interest rates aggressively to reduce inflationary pressures.

That has helped weaken sterling.

The meeting of the US Federal Reserve next week will be crucial, after the Fed's 0.5% increase in US rates last time.