Hawks gain no ground at March MPC vote

The minutes from the March Monetary Policy Committee (MPC) meeting released on Wednesday showed the status quo reigned, with six members in favour of keeping interest rates on hold and only three against.

Notorious hawk Andrew Sentance was the sole member to vote for a 0.5% hike in the base rate, while Martin Weale and Spencer Dale preferred to increase it by 0.25%.

The governor of the Bank of England, Mervyn King, was joined by the remaining five members in voting to maintain the rate at its record low of 0.5% for at least another month.

Speculation that Charles Bean would be the next member to swap allegiance to 'Team Hawk', so far remains unfounded.

In its assessment of the economy, the MPC said the most recent indicators of output at the time of the meeting (9 and 10 March) tended to support the view that growth had resumed in the first quarter after a shock 0.6% contraction in the final quarter of 2010.

But the committee alluded to much weaker household expenditure in the second half of 2010 and since the start of 2011.

In its assessment of Consumer Price Index (CPI) inflation the MPC noted the rise to 4% in January from 3.7% in December. At that point, data showing an increase in CPI inflation to 4.4% had not been released.

The minutes reveal the committee was unsure of how much businesses will pass on the VAT increase to consumers, but yesterday's CPI measure - which came in higher than expected - indicates the pass-through has stepped up since the start of the year.

Evidence that private sector wage settlements had risen in the first few months of 2011 was still scant, it added and wage freezes in the public sector was expected to weigh on pay growth in the economy as a whole.

For this reason, the committee judged inflation was likely to fall back in the medium term as the impact of higher commodity prices, increased VAT and the past depreciation of sterling "dissipated".

The MPC said there was "significant risk that inflation would exceed 5% in the near term".

Impact on the pound

The pound was down against most of its counterparts in the immediate aftermath of the minutes release, which also reflected wary sentiment ahead of the chancellor's Budget at lunchtime.

Sterling was 0.46% down on the dollar at 1.6298 and 0.37% lower against the euro at 1.1489.

Howard Archer, chief European and UK economist at IHS Global Insight, said: "It is notable that the hawks failed to add to their rank in March and furthermore the minutes do not come across as appreciably more hawkish than in February with most MPC members still reluctant to hike interest rates due to concerns and uncertainties over the growth outlook."

Pound bulls would have been hoping for another member to swell the ranks of the hawks as this would mean they only required one more turncoat to gain the majority.

The pound was given a boost yesterday after data showing the rise in inflation was released, but this latest development does little to “clear the fog surrounding exactly when interest rates will start to rise”, according to Archer.

He predicted interest rates would rise to only 1% by the end of 2011 and 2% by the end of 2012.

Duncan Higgins, currency analyst at CaxtonFX, said: "Rather than striking a more hawkish tone, the minutes actually reiterated a higher degree of uncertainty, suggesting that it could be a few months yet before we see further votes for a rate rise."