Bank of England policymakers warn of rising interest rates ahead as recovery falters

Bank of England policymakers greeted the upcoming interest rate meeting with a view that rates will need to rise sooner than expected as economists show that the recovery has faltered.

Economists writing over the last few days said that the recovery was 'rapidly losing momentum' after services sector PMI (Purchasing Manager's Index) slowed from 54.4 to 53.1.

"With the construction and manufacturing surveys also slipping in July, a weighted average of the surveys is now consistent with GDP growth of just under 0.5%. Overall, then, it continues to look like the recovery is rapidly losing momentum." said Vicky Redwood, senior Economist at Capital Economics.

"The outlook for interest rates has become more uncertain." said Howard Archer, chief economist at IHS Global Insight.

"In fact, latest survey evidence showing service sector activity moderating appreciably in July and consumer confidence sinking to a 12-month low reinforces concern that the recovery will lose momentum over the coming months." he added, though noted that the stronger sterling will ease some inflation concerns.

INFLATION CONCERNS

The Bank of England meanwhile, which meets tomorrow on Monetary Policy will once again vote on whether to raise interest rates after last month's 7-1 vote against.

Andrew Sentence, well known 'hawk' on the MPC (Monetary Policy Committee) will vote once again for a raise of 0.25 points though it is unknown how the others could react after recent GDP growth of 1.1 pct was 'stronger than expected'.

WAIT AND SEE

The predominant feeling however is that the Monetary Policy for now is 'wait and see' with the 'doves' outruling any other sentiment on the committee.

However, with rising inflation uneased by today's shop price inflation announcement, that saw food inflation soar from 1.7 pct in June to 2.5 pct in July, analysts will continue to watch for any signs of impending raises.

"There is a looming possibility we may get a spike in food prices rising out of climatic conditions, and not just temporarily. I wouldn't be surprised if food prices lead a rise in inflation of 0.5 percentage points by the fourth quarter [of the year]." said Charles Goodhart a previous member of the Monetary Policy Committee.

Mr Goodhart fears that the Bank will raise rates in response to 'uncontrolled' rises in inflation whilst, Sir John Gieve another former Bank of England policymaker commenting today said that rates would likely go up fast anyway, once the 'recovery' is ensured.

"I think the Bank will have learned a lesson from the Greenspan years after the dotcom boom when the US was very slow to raise rates back to normal levels. When the Bank thinks recovery is established they will want to normalise quite quickly." he added.

The two former policymakers both outlined the severe nature of the Monetary Policy' Committee's decision.

Addressing the Fathom Financial Consulting Monetary Policy Forum, Sir John said: "I am expecting a recovery - when that is strongly established I'd expect rates to start rising faster than the market currently expects. I wouldn't at all be surprised to see interest rates at 2.5 pct a year from now."