carney contemplates the conceptually correct. Photographer: Simon Dawson/Bloomberg
carney contemplates the conceptually correct. Photographer: Simon Dawson/Bloomberg

At his Aug. 13 press conference to present the Bank of England's quarterly inflation report, Governor Mark Carney sashayed around a direct question asking whether an early interest-rate increase might be a helpful way to ensure borrowing costs rise only slowly and gradually. Minutes of the central bank's most recent policy meeting, released today, suggest his discomfort was warranted -- and that an increase is likely even before wages start to grow.

Two of the nine Monetary Policy Committee members voted to raise the benchmark rate from its record low 0.5 percent when they met Aug. 6-7. It's the first crack in the consensus since July 2011.

“An early rise would facilitate the committee’s aspiration that rises in bank rate should be only gradual,” was an argument put forward by Martin Weale and Ian McCafferty, the two dissenters. Economic circumstances, they said, were "sufficient to justify an immediate rise in bank rate."

The majority disagreed. “For most members, there remained insufficient evidence of inflationary pressures to justify an immediate increase. There would be merit in waiting to see firmer evidence that solid increases in pay growth were in prospect before tightening.”

Note the words "in prospect." In a weekend interview published by the Sunday Times, Carney said the likelihood of higher earnings may suffice to raise interest rates, even in the absence of an actual improvement:

We have to have the confidence that prospective real wages are going to be growing sustainably. We don’t have to wait for the fact of that turn to raise them.

U.K. policymakers would do well to study the post-crisis history of the European Central Bank before pulling the trigger. Twice, in 2008 and again in 2011, the ECB pushed borrowing costs higher, only to have to unwind the tightenings, which soon proved to have been premature, with unseemly haste:

Source: Bloomberg
Source: Bloomberg

Policy makers, both in the U.K. and the U.S., get uncomfortable with interest rates staying near the so-called zero bound for so long, concerned that it breeds complacency among borrowers. Even if they stay true to their pledge that the post-crisis economic environment means borrowing costs are likely to stay lower for longer, there's a growing momentum to get the first increase in place. Investors, companies and consumers should take heed.

To contact the author of this article: Mark Gilbert at magilbert@bloomberg.net.

To contact the editor responsible for this article: Marc Champion at mchampionm7@bloomberg.net.