Governor Mark Carney said "rates will need to start to rise" as the UK economy gets back to normal – GDP is already back at pre-crisis levels – but stressed the Bank's monetary policy committee was not yet satisfied with wage growth.
"The MPC has no pre-set course, and the timing of any increases in interest rates will be determined by the data," he told a conference in Glasgow, adding that any increases from the all-time low of 0.5% would be "gradual and limited".
His comments were reflected in the minutes of the July meeting of the MPC, which showed that although all nine members voted in favour of leaving rates on hold, a rise is drawing closer because "for some members the decision had become more balanced".
Wage growth has not consistently outpaced inflation since 2008, meaning that the average UK household has suffered falling real pay for a prolonged period. The latest official data showed that pay including bonuses rose by 0.3% from March to May compared with a year earlier, or by 0.7% when stripping out bonuses. In contrast, inflation was 1.5% in May, rising to 1.9% in June.
Economists said the MPC was likely to become increasingly divided in the coming months, with some members starting to vote for a rise in interest rates.
Philip Shaw, economist at Investec, said: "The August inflation report should be a watershed as one or more individuals may start to vote for higher interest rates and markets will consider that a rate increase is becoming a more realistic possibility. From [the] minutes though there is also a chance that the MPC changes its reaction function and places more weight on pay, which could delay any tightening."
Setting out the argument for an early rate rise, the MPC said there was potentially little risk associated with a small increase in borrowing costs against a backdrop of economic growth: "On one interpretation, the risk of a small rise in bank rates derailing the expansion and leaving inflation below the target in the medium term was receding as that expansion became more established."
The committee said it was likely that the degree of slack in the economy is being absorbed more rapidly than the Bank had expected in May, when its forecasts were last updated. That suggests a rate rise would be appropriate sooner rather than later.
In the case against, members said there was little sign of inflationary pressures building, with wage growth "surprisingly weak". They noted: "There were early signs that global growth was weakening, and an unexpected increase in interest rates when real wages were not yet rising could lead to an outsized reaction in asset prices and destabilise the recovery."
The debate among MPC members underlined the difficulty it is facing trying to balance the risk of leaving rates too low amid strong growth, and raising them too quickly, leaving households and businesses vulnerable to a fresh shock.
Carney said that the Bank was concerned households would become too heavily indebted in a low interest rate environment, which would threaten the wider economy. "The Bank is well aware that a prolonged period of historically low interest rates could encourage other risks to develop. In the UK, the biggest risks are associated with the housing market," he said.
"History shows that the British people do everything they can to pay their mortgages. That means cutting back deeply on expenditures when the unexpected happens. If a lot of people are highly indebted, that could tip the economy into recession."
The Bank is predicting growth will peak at 0.9% in the second quarter, following 0.8% growth in the first quarter. The MPC expects growth to slow modestly in the second half of the year.
Committee members suggested that the UK housing market was cooling, following a drop in mortgage approvals and applications, and a fall in buyer inquiries in London, which would probably start to weigh on house-price growth.
"Taking all these factors together there was some expectation that, when the committee came to update its forecast, the outlook for activity in the housing market would be slightly less strong than it had previously thought.
"Weakening housing-market activity might in due course lead to some moderation in house price inflation."
At the July meeting – the first attended by new MPC member Kristin Forbes – committee members expressed surprise at how little markets were reacting to rising geopolitical risks.
"Global financial markets continued to be relatively unresponsive to both economic risks and geopolitical events. Market measures of uncertainty about future asset prices suggested that, for a wide range of assets, it was surprisingly low. Some increase in volatility was likely as the monetary stance became less expansionary in advanced countries."
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