Bank of England concerned on inflation

BoE's monetary policy minutes of 9/10 June had a major surprise: one member of the Committee (Andrew Sentance) voted against the decision to maintain rates unchanged at 0.5%, preferring an increase to 0.75%. The reason behind his vote was the higher than expected inflation trend in the last few months. However, according to BoE's minutes, inflation developments concerned the whole of Monetary Policy Committee. The minutes underscored that inflation was higher than expected in the last few months and that may remain above target if the private sector’s expectations of inflation over the medium term also rose. The major risks on inflation outlook were the measures to be announced in the budget and the "considerable uncertainties about the margin of spare capacity and the strength of its influence on inflation". Despite one member's vote in favour of rate hike, we believe that the building of a consensus inside the BoE toward a removal of easing monetary policy is hard to envisage in the short term due to moderate rate of growth. Only in the case the substantial margin of spare capacity would fail to lower inflation in H2 '10 the BoE will start considering raising rates.