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When the Governor of the Bank of England speaks you can read about it on the front page of most newspapers (whatever he says). Last night's Mansion House speech is no exception - and for good reason. The inclusion of a line pointing to the possibility of interest rate rises 'sooner than markets currently expect' is what has sparked the interest.

The dial has been gradually moving towards MPC action, almost as soon as the Bank set out its forward guidance some ten months ago. This was a necessary and balanced reaction to the surprisingly strong pick up in growth and in the labour market.

A quick review of the Bank's messaging in recent Inflation Reports shows that we've moved from February's continuing warning of 'significant headwinds — both at home and from abroad' and spare capacity concentrated in the labour market meaning 'Bank Rate may need to remain at low levels for some time to come' to the view in May, which set out that when Bank Rate does start to go up, it would do so only gradually. Most recently, the May MPC minutes hinted that the debate inside the Committee was likely to start heating up in the months ahead given that there was now a 'variety of views on the appropriate path of monetary policy'.

As of last month, most forecasters were still expecting no rate hikes this year (see HMT survey here). Since those forecasts were made there has been little substantive change in the economic picture - recent trends of positive activity across the main economic sectors continues, inflation remains below target, wage growth is subdued and unemployment has edged down further. But as we highlighted in our Monthly Briefing things aren't normal - GDP per head is far below pre-crisis levels, export growth is struggling to recover and substantial public spending cuts are still to kick in - to name a few issues still facing the UK.

This all leaves the decision in finely balanced territory for the time being. The minutes of the June MPC meeting should shed more light on which view is starting to win out - we'll be blogging on the key points, as usual, next Wednesday. However, in the meantime, the prospect of rate rises isn't too much of a concern for the manufacturers we've been speaking to recently. Some have limited borrowing and others (SMEs) have seen elevated spreads on lending which shouldn't be impacted significantly by modest small increases in Bank Rate. Perhaps more of an issue to some is the impact on Sterling, which notched up further gains following last night's speech.

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Chief Economist

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