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Wednesday, 19 July, 2000, 10:10 GMT 11:10 UK
MPC warns on spending
The MPC has kept rates on hold for five months
The MPC has kept rates on hold for five months
The Bank of England voted unanimously to keep interest rates on hold at 6% this month.

But it warned the higher public spending might lead to pressures to raise rates later on.

Given the likely increases in public spending over the next two years, private sector spending needed to slow further if the inflation target were to be met

Bank of England's MPC
In the previous month, the Bank had been split, with the Monetary Policy Committee voting 6-3 for a rate pause.

The Bank of England has now left rates unchanged for five months, after raising them sharply between September and February.

The minutes of the meeting show that the MPC believed that inflationary pressures were easing, "with a slowdown in domestic demand, for instance, in retail sales, and the housing market, and lower than expected, although possibly erratic, average earnings numbers".

Retail sales worry

But other figures released on Wednesday, which show that retail sales were unexpectedly strong in June, may revive fears of inflationary pressures.

Retail sales grew by 0.7% on the month, or by 4.5% year-on-year, against an expectation of only an 0.1% increase.

"The new figures will make the hawks think again. The odds are still against a hike next month but there is still a very large risk that rates have yet to peak this cycle," said Jeremy Hawkins of the Bank of America.

The value of the pound sterling also rose in foreign currency markets as dealers anticipated a rate rise.

Warning to the government

The MPC "hawks", who are believed to include deputy governor Mervyn King and chief economist John Vickers, warned that the boost to government spending in the Comprehensive Spending Review could be inflationary.

Public spending is set to rise by 5% in the current financial year and by 3.3% for the next three years to 2003-4.

"Looking forward, given the likely increases in public spending over the next two years, private sector spending needed to slow further if the inflation target were to be met," they argued.

They warned that the average earnings series was erratic, pay settlements were edging up, the labour market remained tight and consumer borrowing was still strong, all of which could mean interest rates would need to be raised later in the year.

The Problem of Sterling

The MPC was concerned that a decline in the value of sterling, and the continuing rise in oil prices, would put pressure on inflation.

Currently, underlying inflation is running at 2%, well below the Bank's 2.5% target rate. The Bank said that it was now likely that the underlying inflation rate would move closer to the target rate over the rest of the year.

But it warned that there was a risk that "any change in UK rates would lead to a larger change in expectations than was warranted, with a corresponding effect on exchange rates."

The boost to exports and the economy from a lower pound would add to inflationary pressures, and it was unclear whether the economy was still growing at around 3% this year.

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See also:

21 Jun 00 | Business
MPC split on rate rise
06 Jul 00 | Business
Euro, UK rates on hold
24 May 00 | Business
UK economy buoyant
05 Jul 00 | Business
UK house prices dip
17 Jul 00 | Business
High Noon at the Bank of England
19 Jul 00 | Business
Shop sales still strong
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