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BOE Officials May Give Signal on Shift Toward Rate Increase

Bank of England Governor Mervyn King
Mervyn King governor of the Bank of England. Photographer: Chris Ratcliife/Bloomberg

Bank of England policy makers may this week signal how quickly the momentum toward higher interest rates is building as inflation accelerates to more than twice the central bank’s target.

U.K. central bank official Adam Posen will speak about inflation expectations today at 5 p.m. in Oxford, England. The bank will tomorrow publish minutes of its Feb. 10 decision, when the divided Monetary Policy Committee left the key interest rate at a record low 0.5 percent. Andrew Sentance, who has led calls for a rate increase, David Miles, Charles Bean and Martin Weale are also scheduled to speak this week.

Governor Mervyn King said Feb. 16 there are “real differences” among policy makers as he argued that an expected surge in inflation above 4 percent is temporary and that it will ease to the bank’s goal. Sentance and Weale voted to increase the key rate last month, with the former responding to King on Feb. 17 by saying the bank’s forecasts are “too optimistic.”

“There is definitely a shift in tone -- it’s become more hawkish,” Joost Beaumont, an economist at ABN Amro in Amsterdam, said in a telephone interview. “The bottom line is whether Sentance and Weale have been joined by a third member” in voting for an increase.

Inflation Outlook

The bank’s latest inflation projections last week prompted economists including Simon Hayes at Barclays Capital to bring forward their forecast for the first rate increase this year. Hayes changed his prediction to May from November, as did Ross Walker, an economist at Royal Bank of Scotland Group Plc.

The bank projected in its Inflation Report on Feb. 16 that consumer-price growth will accelerate to about 4.4 percent this year before easing to its 2 percent target by the middle of 2012. Risks are “skewed to the upside,” it said.

The implied yield on June short-sterling futures has climbed 29 basis points this year to 1.19 percent, indicating investors have increased bets that borrowing costs will rise. The pound fell 0.4 percent to $1.6164 as of 10:34 a.m. in London, paring its gain this year to 3.5 percent.

While Sentance and Weale voted in February for the bank to raise its key rate by 25 basis points, Posen kept up his call for an expansion of the emergency bond-purchase program to aid the recovery. The remaining six members of the panel voted to maintain the current policy. That balance may have shifted this month, says Alan Clarke, an economist at BNP Paribas in London.

“My feeling is that there were some other members that were sympathetic to the case for dissenting in favor of a hike,” he said. If the minutes show a third official voted for an increase, “the market would really think that this is one of the last nails in the coffin for the 0.5 percent bank rate.”

ECB Rhetoric

Europe Central Bank policy makers have also stepped up their rhetoric on inflation. Executive Board member Juergen Stark said late yesterday that the bank is “prepared to act decisively and immediately if needed.” Lorenzo Bini Smaghi said that with the euro-area economy gathering strength, the ECB may need to reassess whether its benchmark rate is still appropriate at a record low of 1 percent.

Some U.K. policy makers may be wary of increasing interest rates as the economy, which shrank 0.5 percent in the fourth quarter, faces a budget squeeze that includes higher taxes and the elimination of 330,000 public-sector jobs. King said last week that the recovery is “unlikely to be smooth.”

“We take those decisions month to month,” he said. “Surely if we’ve learned anything from the past three or four years, it’s that so many unexpected things can happen.”

‘Soft Tyranny’

Clarke at BNP said that while a rate increase will “reinforce the headwinds,” it “won’t completely destroy the recovery.” He sees the first increase in August.

Weale set out his position yesterday, saying that the bank has to “think about medium-term risks” to inflation.

“If people expect high rates of inflation, there’s a risk they may build those expectations into their current behavior,” he said in a BBC Radio 4 interview.

Posen’s address today, entitled “The Soft Tyranny of Inflation Expectations,” is the first in a series of policy maker speeches this week.

Miles is due to speak in London tomorrow, when he will discuss “how best to set monetary policy” after “shocks” from the financial crisis and commodity-price increases, according to the listing on the organizers’ website. Weale will address an audience in Oxford at 3:30 p.m. on Feb. 24, while Sentance will speak at an event in London three hours later.

Posen is scheduled to speak again on Feb. 25 in Mumbai, while Deputy Governor Charles Bean will take part in the U.S. Monetary Policy Forum in New York later that day.

“The MPC is likely to give itself a little more time to form a clearer view on how strong economic growth will be in the first half,” Jean-Michel Six, an economist at Standard & Poor’s in Paris, said in a research note today. “Yet, with its credibility as an inflation fighter increasingly at stake,” it may raise rates “by the autumn -- or even sooner.”

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