Bank policymakers soothe rate concerns

Bank of England policymakers calmed market expectations of early interest rate rises, saying on Thursday that they wanted to avoid a marked economic slowdown which might pull the inflation rate below target.

While several Monetary Policy Committee members told a parliamentary committee they had considered raising interest rates at their last meeting to keep inflation down, the overall message of the testimony was balanced.

Markets, which have been pricing in interest rate rises this year, moved to discount a lower probability of this happening, especially after Bank Governor Mervyn King said the sharp gyrations in interest rate pricing had been puzzling.

While MPC members are clearly worried by the prospect of inflation rising past 4 percent this year and feeding into higher wages, they were also conscious that the economy was slowing and this would help tame price pressures.

"The economic slowdown will need to be sufficient to ensure that inflation does not persist above the target. But at the same time, we need to avoid a slowdown that is so pronounced that it would pull inflation down, not just to the target, but below," Bank Governor Mervyn King said.

Five members of the Bank's Monetary Policy Committee (MPC) were giving testimony to parliament's Treasury Committee on the central bank's May inflation report.

"Overall, the various comments from MPC members over recent weeks look like a recipe for the Bank to sit on it hands in the coming months," said Dominic Bryant, economist at BNP Paribas.

Asked about whether he was being dovish or hawkish, King said he did not know what level of interest rates would be required to get inflation to the 2 percent target. His recent comments, he said, were meant to be "balanced."

DATAWATCH

Even arch-hawk Tim Besley said he was keeping an open mind on rates though he had been thinking about rate rises at both the May and June MPC meetings.

More surprising was the news that fellow MPC member Kate Barker had also considered raising rates this month. As did deputy governor John Gieve and executive director Paul Tucker.

Many economists had thought the numbers contemplating rate rises at the last MPC meeting would have been fewer.

"What is apparent from the testimonies, is that if the Bank of England does change interest rates in the near term, it will be to raise them," said Howard Archer, economist at Global Insight.

"Much will also depend on just how weak growth is over the coming months and whether or not this increasingly limits companies' pricing power."

Gieve said recent consumer spending data - retail sales shot up a record 3.5 percent in May - had been surprisingly strong and had policymakers questioning whether the economy was really slowing enough to get inflation down.

"The message the BoE appears to be trying to get across is that it is in datawatch mode and that it requires both an observed slowdown in economic activity as well as stable wage growth to prevent it from raising rates," said Matthew Sharratt, economist at Bank of America.

"While, on balance, we look for unchanged rates this year as inflation peaks above 4 percent during the third quarter but at the same time GDP growth slows down sharply, we still see the BoE having an implicit tightening bias."