EXPECTATIONS that the next move in benchmark UK interest rates will be up rather than down, in spite of the country suffering deflation, have been reinforced by minutes of the latest Monetary Policy Committee meeting.

 

The newly-published minutes signal that members of the nine-strong Bank of England committee will not be overly concerned about deflation and are likely to believe it will prove temporary.

Economists reiterated their belief, in the wake of publication of the minutes, that the first rise in UK base rates from their record low of 0.5 per cent was likely to come next year.

Figures published by the Office for National Statistics on Tuesday showed that the UK recorded annual deflation of 0.1 per cent on the consumer prices index (CPI) measure in April.

The ONS said that, based on comparable historic estimates, the last time the UK saw consumer price deflation was in the year to March 1960, when prices fell by an estimated 0.6 per cent.

Setting out MPC members' discussion when they voted unanimously to hold UK base rates at 0.5 per cent on May 8, the minutes state: "In the absence of further falls in commodity prices, inflation rates close to zero were unlikely to endure for very long. The committee's central expectation was that CPI inflation would pick up notably towards the end of the year."

The minutes show that, for two members, the decision two weeks ago remained "finely balanced" between holding and raising rates.

This almost certainly refers to Martin Weale and Ian McCafferty, external MPC members who in January abandoned their previous calls for a quarter-point rise in rates.

Vicky Redwood, chief UK economist at consultancy Capital Economics, noted that MPC members would not have seen a preview of Tuesday's CPI figures when they met two weeks ago.

However, the minutes note MPC members' belief two weeks ago that "it was more likely than not that inflation would briefly turn slightly negative in the near term".

Referring to the two MPC members for whom the rate decision was finely balanced two weeks ago, Ms Redwood said: "We wouldn't be surprised if those two - presumably Ian

McCafferty and Martin Weale - start voting for a rate rise before the end of the year.

In fact, given the rebound in oil prices and lack of any second-round effects from low

inflation, this could happen as soon as the next month or two."

She added: "However, there were no indications in the minutes that any other members are

thinking of joining them. Note that there was a range of views on the committee

about the current degree of slack in the economy and how quickly it would be used

up, suggesting that there are also some members with a more dovish view than the

MPC's central projection."

Ms Redwood noted that the MPC did "not seem too worried" about the fact that the UK was in

deflation.

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "The May MPC minutes indicate that there is little likelihood of the Bank of England cutting interest rates despite the UK dipping into deflation in April, and they appear to reinforce the view that the Bank of England will start inching interest rates up during the first half of 2016. It currently looks a very close call as to whether the Bank of England acts in the first or second quarter."

The minutes also show that the MPC voted unanimously to maintain the scale of its stimulatory quantitative easing programme at £375 billion two weeks ago.