Pre-emptive rates hike was a close vote

The Bank of England's unexpected decision to increase interest rates earlier this month was a pre-emptive strike to avoid even higher rises, the governor Mervyn King has revealed.

However, minutes of the Bank’s Monetary Policy Committee meeting released this morning reveal that though it was a deliberately poised ‘surprise’ rise, it was far from clear which way the members would vote.

In the end, the Bank of England's committee voted by the narrowest of margins, 5-4, to raise interest rates to 5.25%. Five members of the Committee (the governor, John Gieve, Kate Barker, Tim Besley and Andrew Sentance) voted in favour of the proposition. Rachel Lomax, Charlie Bean, David Blanchflower and Paul Tucker voted against, preferring to maintain Bank Rate at 5.0%.

Pre-emptive strike to avoid even higher rises

Speaking to the Birmingham Chamber of Commerce on Tuesday, Mervyn King said that the quarter of a point rise to 5.25% was vital to prevent inflation straying further beyond the government's 2% target.

"By responding early to changes in the inflation outlook, the MPC ultimately needs to raise interest rates by less than would be the case if we delayed," he said.

But the governor gave no hints on whether there would be further rate rises.

Minutes of the MPC meeting show a flavour for surprising the institutions with a rise that did not conform to their expectations. Recording the committee’s view on policy the minutes said, “Committee noted that an immediate change in Bank Rate would clearly be a surprise to financial markets. Market prices indicated that a rate rise of 25 basis points was expected, but not until February. This probably reflected the fact that the Committee had not changed interest rates other than in an Inflation Report month for some 2½ years.”

"For a majority of members there was already sufficient evidence to justify an increase in Bank Rate and no compelling reason to delay," the minutes added.