ANOTHER swift rise in benchmark UK interest rates looked increasingly likely last night, when Bank of England chief economist Charlie Bean warned of medium-term inflationary dangers and declared the Monetary Policy Committee could not "afford to relax".
Bean, who has in the past been a dove, gave his hawkish speech at the end of a day in which it emerged MPC members Andrew Sentance and Tim Besley voted unsuccessfully for an immediate further rate rise two weeks ago.
The speech also followed a survey yesterday from the Confederation of British Industry showing UK manufacturers' order books and output expectations at their strongest since 1995. Particularly worrying for the MPC will be UK manufacturers' great confidence, in the survey, that they can push through price rises to claw back profit margin lost through a since-subsided surge in energy prices.
Sentance and Besley, external MPC members rather than Bank of England staff, had been viewed as most likely to want to follow January's quarter-point rise in base rates to 5.25% with a consecutive monthly rise two weeks ago.
However, while they were outvoted by their seven MPC colleagues, minutes of the February 7 and 8 meeting yesterday painted a picture of a committee in wait-and-see mode but ready to move again whenever necessary.
The minutes hammered home the fact the MPC's latest central projection for annual consumer prices index inflation at constant interest rates would be higher than its forecast assuming implementation of the further quarter-point rise priced in already by financial markets. It is the latter projection which has CPI inflation coming in around the 2% target on the chosen two-year time horizon.
Yesterday's minutes leave open a slight possibility that Besley and Sentance might yet see their desire for another rise unfulfilled by stating: "It was difficult to judge whether, and if so by how much, policy might need to be further tightened to keep inflation on track to meet the target."
However, the more moderate Bean also appeared worried about inflationary dangers in his speech in Huddersfield. He believes the MPC must look through the expected short-term tumble in annual CPI inflation from its current 2.7%, even though an impending plunge in household electricity and gas bills from recent peaks might take it below 2% in the short term.
Bean is not a hawk. He sided with four external MPC members in August 2005 to bring about a quarter-point cut in rates opposed by his four fellow Bank staffers, and also opposed January's rate rise.
Although noting last night that the recent surge in energy prices had not fuelled inflation to the extent it would have 30 years ago, Bean added: "So does that mean everything is set fair, now that oil prices have eased back from their late summer high and the energy companies have started to announce future cuts in retail gas and electricity prices? Certainly inflation is likely to fall back sharply through this year. Just how quickly it will fall back is difficult to predict, because so much depends on the pricing decisions of a few energy suppliers. Indeed, it is quite possible that inflation could be temporarily well below the 2% target in the latter part of this year.
"But that does not mean that the MPC can afford to relax about inflationary pressures. Just as the sharp upward movement in inflation over the past year may have exaggerated the pick-up in underlying inflation, so the prospective fall-back is likely to overstate the extent to which inflationary pressures have abated. The MPC needs to look through all this near-term volatility in order to judge whether inflation is on track to meet our target in the medium term."
Bean cited "differences of opinion" within the MPC and said these "inevitably make it hard to know where interest rates will go next". He repeated the MPC's claim that it did not give "hidden hints" on the future path of interest rates.
However, he said "raised inflation perceptions" posed "a risk of heightened pressures on pay". Bean also cited signs from surveys that firms have become "somewhat more confident in their ability to push through price increases".
He added: "That may not matter too much if it is just a one-off adjustment, as margins recover from last year's energy-price-induced squeeze. But we would be concerned if it foreshadowed a more persistent uptick in output price inflation."
Bean also said the biggest inflation-dampening benefits from switching production to the Far East "may have already taken place".
Although predicting household spending growth "will probably be rather less rapid than for much of the past decade", he noted a boost to family budgets from falling energy bills and a possible fillip from higher equity and house prices.
London School of Economics professor Besley and former British Airways chief economist Sentance have been astonishingly hawkish since joining the MPC in September and October respectively. Both have voted four times for a quarter-point rise in base rates, being in the majority when increases were implemented in November and January and in the minority in October and this month. Sentance has voted for no change only once in five meetings and Besley twice in six.
Minutes of the February MPC meeting say: "For these members, the degree of policy tightening since August (from base rates of 4.5% to 5.25%) was still modest relative to the rise in inflation and the prospective robust outlook for demand."
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