The MPC is debating when to raise interest rates. No member, presumably, thinks that policy should be loosened. A backdoor easing, however, is taking place as banks continue to cut lending and deposit rates. An immediate rise in Bank rate is needed simply to offset this additional monetary stimulus.

The chart shows estimates of the average interest rates banks receive / pay on the outstanding stocks of household lending and deposits. The average lending rate has fallen by 0.24% since end-2012 while the deposit rate has been cut by 0.58%*. The lending / deposit rate spread, nevertheless, remains low by historical standards.

These averages are likely to fall further, since the interest rates on new business are below those on the outstanding stocks. New fixed-rate bonds, for example, now yield just 1.34% versus 2.38% on the yet-to-mature stock. Similarly, the interest rate on new fixed-rate mortgages is 3.23% versus 3.67% on outstanding loans**.

Monetary conditions at end-2012 were sufficiently loose to generate strong nominal and real GDP growth. The fall in lending / deposit rates since then represents an unwarranted further relaxation, requiring an MPC response. With the supply of funding expanding***, a half-point Bank rate hike might be needed to return average deposit / lending rates to end-2012 levels.

MPC officials have argued that it was necessary to maintain official rates at an emergency level because of an unusually large wedge between bank interest rates and Bank rate. With this wedge narrowing, a compensating adjustment in Bank rate is overdue.

*As of May. Averages estimated from Bank of England interest rate and volume data for different types of business.
**Bankstats table G1.4.
***Banks expect an increased supply of household deposits in the third quarter, partly due to the introduction of NISAs, according to the latest Bank of England bank liabilities survey.