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News Analysis: Bank of England moves closer to first rate rise in five years

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(Globalpost/GlobalPost)

LONDON, July 23 (Xinhua) -- The UK central bank, the Bank of England (BOE), has moved a step closer to raising the Bank Rate for the first time in over five years, according to the minutes of its rate-setting committee.

The minutes of the Monetary Policy Committee (MPC) for July released Wednesday showed that a serious consideration of a Bank Rate rise is on the cards in the coming months.

The minutes noted that the current economic recovery was robust, and that "the risk of a small rise in Bank Rate derailing the expansion and leaving inflation below the target in the medium term was receding as that expansion became more established".

The Bank Rate has been at an historical low of 0.5 percent since March 2009.

The BOE moved then to stimulate an economy in deep recession as the financial crisis struck, and it felt that a move upwards after that would tip the stagnant economic growth seen in many of the years since then into further recession.

It is only with the return of significant economic growth from the start of 2013, which saw annual growth of 1.8 percent, that the BOE has tentatively begun to consider setting off on the path to normalize monetary policy.

The BOE's own estimate for GDP growth in 2014 is 3.1 percent, well ahead of the long-term trend of 2-2.5 percent, and the fastest growth rate among G7 nations.

In addition, the BOE can be satisfied that Consumer Price Inflation (CPI) remains below the 2 percent target, despite rising in June to 1.9 percent. This rise is seen as a blip by the BOE, driven by a change in the beginning of the annual summer sales.

Job creation has been strong over the past year also. There are now 30.1 million jobs in the British economy, a record figure, and the unemployment rate has fallen from 7.8 percent in May 2013 to 6.5 percent this May, the lowest figure since December 2008.

DOES DATA BACK A RATE RISE?

With inflation not posing a threat, job creation forging ahead, and GDP set for strong growth, the MPC is seriously pondering if conditions are right for a rate rise.

July's minutes stated that "sustained economic momentum was generally looking more assured" and that "the mix of expenditure growth had broadened further", indicating a lessening of anxiety about the effects of a rate rise.

In addition, the minutes showed that the BOE expects GDP growth for Q1 this year to be revised up to 0.9 percent from its current 0.8 percent figure, and that Q2 will also see 0.9 percent growth. The minutes stated that the BOE sees growth "slowing modestly into the third and fourth quarters".

The focus of BOE worries now are on the size of the slack in the economy and the rate at which it is being taken up, both crucial to the timing of a rate rise and both difficult to judge accurately.

The minutes noted a disconnect between the strong pace of job creation (and the concurrent fall in the jobless rate) and the miserable growth in wages, which lag a long way behind CPI inflation.

Yet, MPC members also took note of a Recruitment and Employment Confederation (REC) survey from the beginning of this month which recorded wages growth for new workers at a record high, indicating that slack was being taken up at a quick rate.

The minutes noted that raising the Bank Rate soon could would "facilitate a more gradual path thereafter", and a rise of just 0.25 percent before the year's end would certainly let the BOE gauge how businesses and households would react to the beginning of a return to more normal monetary policy.

But the minutes also showed that members felt that "an unexpected increase in interest rates when real wages were not yet rising could lead to an outsized reaction in asset prices and destabilise the recovery".

The current MPC voted 9-0 to keep the Bank Rate where it is. But the August meeting will see the first meeting after a prolonged period of personnel change which has seen a third of the members change, and there could be a more open split among those members.

In addition, the August MPC meeting will be after the BOE's next quarterly inflation report, which is likely to give a more detailed forecast of inflation and of job creation.

Although there has been no rate rise this month, and there is going to be none next month, the date when it will rise has moved closer.

http://www.globalpost.com/dispatch/news/xinhua-news-agency/140723/news-analysis-bank-england-moves-closer-first-rate-rise-five