MPC votes 9-0 at leaving rate alone but some members see little risk in small rise in borrowing costs

Bank of England policymakers are growing increasingly uneasy at leaving interest rates at a record low of 0.5%, minutes of their latest meeting revealed.

The public record of the July meeting of the Bank's monetary policy committee (MPC) shows that although all nine members voted in favour of leaving rates on hold, a rate rise is drawing closer because "for some members the decision had become more balanced".

Setting out the argument for an early rate rise, the MPC said there would potentially be little risk associated with a small increase in borrowing costs against a backdrop of economic growth.

"On one interpretation, 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.

"A rise in bank rate at a time when the economy was growing strongly would facilitate a more gradual path thereafter and would allow the committee to evaluate the sensitivity of households, firms and financial markets to changes in interest rates, following a long period during which bank rate had remained unchanged."

The MPC has already made it clear that the rates will only rise gradually, and settle around 2-3% rather than the pre-crisis norm of around of 5%.

It noted in the minutes that it was likely that the degree of slack in the UK was being absorbed more rapidly than the Bank had expected in May, when its forecasts were last updated, suggesting a rate rise would be appropriate sooner rather than later.

James Knightley, economist at ING, said: "The minutes to the Bank of England's July MPC meeting suggest that the committee continues to inch towards hiking rates. The debate on rate hikes is starting to open up."

Turning to the case against an early rate rise, the MPC said that although the UK economy was growing consistently, there was little indication of any inflationary pressures building, with wage growth remaining surprisingly weak.

"There were early signs that global growth was weakening, and 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."

MPC members repeated the message that there was no preset timing for the first increase in rates and the timing would be driven by the data, concluding: "Against this backdrop, the committee agreed that no increase was warranted at this meeting, although for some members the decision had become more balanced in the past few months than earlier in the year."

The Bank is forecasting growth of 0.9% in the second quarter, following 0.8% growth in the first quarter. The first official estimate for the second quarter will be published by the Office for National Statistics on Friday.

However, the MPC said growth was likely to slow modestly in the second half of the year, highlighting weaker recent data on exports, car registrations, and manufacturing.

Committee members also suggested the UK housing market was cooling, following a drop in mortgage approvals and applications, and a fall in buyer inquiries in London, which would probably start to weigh on house price growth.

"Taking all these factors together there was some expectation that, when the committee came to update its forecast, the outlook for activity in the housing market would be slightly less strong than it had previously thought.

"Weakening housing-market activity might in due course lead to some moderation in house price inflation."

At the July meeting – the first attended by new MPC member Kristin Forbes – committee members expressed surprise at how little markets were reacting to rising geopolitical risks.

"Global financial markets continued to be relatively unresponsive to both economic risks and geopolitical events. Market measures of uncertainty about future asset prices suggested that, for a wide range of assets, it was surprisingly low. Some increase in volatility was likely as the monetary stance became less expansionary in advanced countries."