Bank overwhelmingly backed interest rates rise

The Bank of England's monetary policy committee (MPC) voted overwhelmingly in favour of raising interest rates earlier this month, minutes of the meeting showed today.

Only one of the nine-strong MPC, external member Marian Bell, opposed the decision to raise the cost of borrowing.

The committee's decision saw rates rise from a 48-year low - by 0.25% to 3.75% - in what was the Bank's first upward move for almost four years.

The majority of committee members felt that a "modest rise" in the key interest rate was "now appropriate" because of stronger evidence of global economic recovery and better balanced growth within the UK.

The minutes of the November 5-6 meeting confirmed the Bank's fears over the public's tendency to spend and borrow on the back of historically low rates.

"If rates were not raised, household borrowing would be more likely to continue to grow at a rate would eventually prove unsustainable, and there would be greater risk of a sharp downward adjustment to house prices if they became more overvalued, complicating the operation of monetary policy," the minutes said.

Household borrowing soared to record levels this summer, and house prices have now picked up again following a hiatus at the beginning of the year.

The Bank's governor, Melvyn King, recently warned people about the risks of taking on too much debt, especially if economic circumstances were to take a turn for the worse.

In a similar vein, the minutes also noted that consumer demand and the housing market were not slowing as much as the committee had expected.

Before the release of the minutes, there had been speculation in the City as to whether discussions about a more aggressive rate rise had taken place. However, the minutes showed that there was no appetite among committee members for such a move.

"The committee also noted that, because of higher household debt burdens, there was increased uncertainty as to the strength of the response of the consumption to any given interest rate change.

"It would therefore be appropriate to move interest rates cautiously," the minutes said.

Most MPC members noted that, even after the increase from 3.5%, "monetary policy would still be 'accommodative'."

In arguing against a rate rise, Ms Bell said that the Bank's inflation projections for the next two years were too high.

In its quarterly inflation report last week, the bank said that underlying inflation - which excludes volatile mortgage interest payments - was still most likely to be above its 2.5% target in two years, and rising even after this month's increase in interest rates.

However, Ms Bell said that there were few signs of recovery in the economic data, with most surveys below their long-term average.

To her, that did not suggest that the UK was in for strong economic growth, which would imply a lower inflation rate than the Bank expected.

The Bank has come under fire for its move this month. The respected economic forecaster, the Ernst & Young Item Club, which uses the same forecasting model as the Treasury, said that the Bank had raised interest rates too soon.

It warned that the prospect of a further rise could push the consumer into serious retrenchment, and send the economy back into stagnation.

But today's minutes could allay fears, especially among manufacturers, that the Bank will push up rates aggressively - some economists had pencilled in a 5% rise by the end of next year.

"The fact that there was no vote for higher rise, and that someone in the MPC thought that the repo (base) rate level set in July was adequate for the UK economy, may calm the markets fearing subsequent rate rises," said Andrij Halushka, an economist with the Centre for Economics and Business Research.