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.
It is regarded as certain that interest rates will remain on hold at 0.5 per cent 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 per cent 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 seven per cent.
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 two to three 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.
Analysts broadly expect to see the first rate rise next spring.