Bank of England Governor King favored an interest rate hike


King, John Gieve, Timothy Besley and Andrew Sentance argued for a quarter-point move to 5.75 percent to cool the economy and quell inflation, minutes of the June 6-7 meeting published by the central bank in London showed.

Bank of England Governor Mervyn King favored an interest-rate increase this month in a 5-4 vote for no change, placing him in the minority for the first time in almost two years.

King, John Gieve, Timothy Besley and Andrew Sentance argued for a quarter-point move to 5.75 percent to cool the economy and quell inflation, minutes of the June 6-7 meeting published by the central bank in London today show. The majority overruled them, citing signs of slower consumer spending and house-price growth.

The size of the minority, predicted by none of 26 economists in a Bloomberg News survey, suggests policy makers are poised to raise interest rates from a six-year high reached in May. Investors have added to bets of higher borrowing costs since King said June 12 that the bank ``may need to take further action'' to return inflation to the 2 percent target.

Higher market interest rates ``gave the committee the scope to hold Bank Rate this month before considering whether to raise again,'' minutes of the meeting showed the majority as saying. For other members, ``there was no compelling reason to wait.''

Futures traders expect the key rate to rise from the current 5.5 percent. The implied rate on the September interest-rate futures contract was at 6.07 percent as of 8:31 a.m. in London.

The contract settles to the three-month London interbank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade.

King was last outvoted in August 2005, when the committee cut the rate by a quarter point to 4.5 percent.

Global Interest Rates

Britain's key rate is higher than the 5.25 percent in the U.S. The European Central Bank raised its key rate to 4 percent this month. Canada's main rate is 4.25 percent.

The Bank of Japan's minutes, published today, showed that policy makers in the world's second-largest economy plan to raise its interest rates gradually. The bank has kept the key overnight lending rate on hold since doubling it to 0.5 percent in February.

``We have a U.K. rate hike penciled in for July,'' said Michael Taylor, an economist at Lombard Street Research in London. ``There's certainly one more hike to come and the risks are on the upside after that.''

Inflation slowed to 2.5 percent in May, the weakest in seven months, after reached a decade-high of 3.1 percent in March.

The U.K. central bank's May 16 forecasts show that inflation will slow to 1.8 percent in the middle of 2008, later than it predicted in February, before returning to the target in two years. The bank expects the economy to grow near 3 percent through 2008 and then slow gradually to just below that level in 2009. Growth was 2.8 percent last year.

`Further Action'

``The Monetary Policy Committee will be watching closely indicators of capacity pressures, pricing intentions and inflation expectations,'' King said June 11. ``If these indicators remain elevated, the MPC may need to take further action.''

U.K. consumers' satisfaction with the Bank of England fell to a seven-year low in May after inflation accelerated to a record, a survey commissioned by the central bank showed June 14. Inflation expectations inflation expectations stayed at an eight-year high in May the survey showed.

The majority on the committee said that growth of money supply and credit posed an ``upside risk'' to spending and inflation.

U.K. money supply growth accelerated to the fastest pace in seven months in May, a separate report from the Bank of England showed today. M4, the broadest gauge of U.K. money supply measuring currency in circulation and deposits at banks, rose 13.8 percent from a year earlier. Economists predicted a 13.4 percent increase, according to the m...


Bloomberg
6/20/2007 6:12:51 AM