Speculation over interest rate rise

Bank of England rate setters will meet on Thursday amid increasing speculation that the burgeoning recovery will soon see cracks emerge in the current consensus on the cost of borrowing.

The MPC is due to meet this week
The MPC is due to meet this week

It is regarded as certain that interest rates will remain on hold at 0.5% this week but observers detect signs that policy makers disagree over key indicators of the economy's improvement which may widen into dissent in the months ahead.

Easing inflation coupled with first quarter growth that fell slightly short of expectations should be enough to persuade the Monetary Policy Committee (MPC) that it is not yet time to bring an end to the low rates that have nursed the UK back to health.

But a fall in unemployment to 6.9% has now formally freed the MPC from the straitjacket of its "forward guidance" policy under which no rise could be considered until joblessness fell to 7%.

The Bank has now updated the guidance to indicate that it will use a more opaque measure of "spare capacity" in the economy and that more of this so-called "slack" must be taken up by the recovery before interest rates can be lifted.

Minutes of the latest MPC meeting in April indicated disagreement about this key factor.

They revealed there was a "range of views" about whether many self-employed people were in fact under-employed and looking for work as employees. That would imply a greater degree of ''slack'' in the economy than the headline jobs figures would suggest.

Investec economist Philip Shaw said: "The loose nature of the new framework, with the aim of eliminating economic slack within 2-3 years, allows considerable scope for a range of views on the committee, and we fully expect this to be reflected in more robust policy debate and in due course, dissent.

"But for the time being the economy is growing healthily without overheating and there seems to be no immediate pressure points in terms of the inflation outlook. Accordingly next week's decision should once again be a clear and uncontroversial 'no change'."

Howard Archer of IHS Global Insight said: "While a near-term interest rate hike remains extremely unlikely opinions within the Bank of England are likely to become more diverse over the coming months about exactly when monetary policy should start to be gradually tightened.

"The more MPC hawkish members may well start to favour a first small rate hike before the end of 2014."

Analysts broadly expect to see the first rate rise next spring.