Bank of England minutes: what the economists say

Two members of the Bank of England's monetary policy committee voted to raise interest rates at its meeting a fortnight ago. Find out what economists thought of the minutes of the meeting, released this morning. Hetal Mehta, UK economist, Daiwa Capital Markets The change in the voting pattern was unexpected. It was expected that members would have waited for the February inflation report. Now we have seen the awful GDP figures, which the MPC would not have seen at the time of their meeting, Martin Weale must be wishing he'd waited. Until yesterday it seemed that more MPC members would gradually vote for higher interest rates, but now any premature rate rise to combat inflation is out of the question. We think the earliest the Bank will now feel comfortable about considering rate hikes in the fourth quarter this year. Vicky Redwood, senior UK economist, Capital Economics January's MPC minutes suggest that the committee was edging closer towards a near-term rate hike – but of course yesterday's weak GDP figures have altered the picture somewhat. Unsurprisingly, most members judged that the risks to inflation in the medium-term had probably shifted upwards. But the Committee also went as far as running through the pros and cons of raising rates and Martin Weale joined Andrew Sentance in actually voting for a 25-basis point rate hike. Even some of those who voted to leave rates on hold saw the decision as "finely balanced" and wanted to wait to assess recent developments in February's inflation report. On their own, then, the minutes suggest that a February rate hike is a bigger danger than before. However, yesterday's GDP figures could well dissuade the waverers from rushing into a premature policy tightening. What's more, some members are still convinced that policy should not be tightened – see Mervyn King's dovish speech last night, and Adam Posen's continued vote for more QE. For now, we still expect rates to stay on hold this year – and even if we do see a rate hike, it might have to be quickly reversed if the economy is as weak as we expect. Chris Williamson, chief economist, Markit The MPC edged closer to hiking rates in January, with Martin Weale joining Andrew Sentance in calling for a quarter point increase. Only Adam Posen called for a further loosening of policy, although he may well find his voice carries stronger resonance following the shock 0.5% fourth quarter contraction in GDP. While the decline in GDP no doubt exaggerates the softening of the economy at the end of last year, the data reinforces the view from the surveys that a weakening underlying trend in domestic demand has been evident since last summer. Despite steep rises in food and fuel prices, 'second-round' inflationary pressures such as rising wages look likely to be kept at bay over the first half of 2011 at least. This offers some reassurance that headline inflation will revert to target after the current spike we are seeing from temporary factors such as tax rises, the exchange rate and higher food and energy prices. However, it is becoming increasingly apparent that this spike is becoming steeper and longer than had been anticipated by many, which is clearly rattling nerves at the Bank of England. If the business surveys rebound in January the case for a rate rise will remain firmly on the MPC's table. David Kern, chief economist at the British Chambers of Commerce These minutes signal an unwelcome shift towards a tougher monetary stance. On this occasion, two members, rather than one, voted in favour of an immediate increase in interest rates. But the economic background has changed significantly for the worse since the meeting took place with a worrying decline in GDP in the fourth quarter of last year. Our view remains that an early increase in interest rates would be a major mistake that would increase the threat of derailing the recovery. While the MPC is rightly concerned about rising inflation, the factors pushing up prices are outside their control. Higher VAT, elevated energy and commodity prices, and increased utility rates would not be affected by higher interest rates. These factors increase the squeeze on business profit margins and on consumer's disposable incomes. British businesses need a prolonged period of low interest rates to cope with the pressures resulting from the implementation of the government's deficit cutting programme. But it is important that the recovery is not threatened. If the economy weakens, the MPC must be prepared to consider a further increase in its quantitative easing programme. Simon James, founding partner of Gore Browne Investment Management It is overwhelmingly clear that growth, not inflation, should be the focus of policy moving forward in 2011. While there is a cacophony of demands for the Bank of England to raise interest rates to curb inflation, such demands are completely misguided at this stage. Consumers have already been cautious and this trend is set to continue. This is no more ably demonstrated than by "plastic cooling", with credit card borrowing falling to £97bn – its lowest level since 2005 – and the number of cards falling by 1.5m to a seven-year low of 60m. While there has been a marked deterioration in confidence about the future, it is debatable as to whether the Bank can reverse this. On further analysis, the prime drivers of inflation are commodity prices and tax changes – factors over which the Bank has no influence. There is no suggestion that these price rises are being transmitted to wage gains, and thus the nature of this "inflation" is to inhibit spending power. If the Bank were to raise interest rates, it would further reduce the ability to consume. Consumption represents more than two-thirds of the UK's economic activity, therefore, placing even further constraints would be a grave mistake. Chris Redfern, senior dealer at Moneycorp Yesterday's GDP data means we're now at a crossroads. I would be surprised if there's any meaningful talk of rate rises until the second half of the year, despite two MPC members voting for an increase in the last meeting. We've seen a small rise for sterling against the dollar this morning and would expect it to gradually recover over the next couple of quarters, presuming there are no further nasty shocks.