UK and US rate hikes: getting closer?

The minutes from the latest meeting of the Bank of England's Monetary Policy Committee (MPC) brought a surprise for financial markets.  Expectations had been that the MPC would once again vote unanimously to keep rates on hold at 0.5%.  Instead, two of the nine members called for an immediate 0.25% rate increase.

Does this mean, as some are suggesting, that a rate increase could now happen before the end of 2014?  That can't be entirely ruled out, but it's still not probable. Between the actual MPC meeting and the release of the minutes, ONS released inflation data for July that showed the year-on-year rise in CPI slipping to 1.6% in July from 1.9% in the previous month. This may not signify any easing in underlying inflation pressures: the improvement was heavily influenced by falling clothing prices, which tell us a lot more about what's happening in Bangladesh and Vietnam than about what may be happening or about to happen in the UK.  Still, it does provide some breathing room for the dovish majority on the MPC.

Looking beyond the CPI numbers themselves, the housing market seems to be slowing,  with a sharp decline in asking prices pointing to weakness in the months ahead;  the Eurozone economy, the UK's biggest trading partner, is still struggling; and there are few signs of wage pressures. In all, it seems likely that the BoE will be comfortable waiting until early 2015 before it seriously contemplates raising rates.  

Meanwhile, the US Federal Reserve released the minutes of the July FOMC meeting earlier today.  Here's the key paragraph:

With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. Indeed, some participants viewed the actual and expected progress toward the Committee's goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee's unemployment and inflation objectives over the medium term.

Given the strength in US employment data in recent months,  it's no surprise to find that the FOMC is focusing on the labor market as a key factor in its policy stance.  There are few signs that rising employment is yet putting any upward pressure on wages, but that is clearly the main risk that the FOMC will need to assess going forward.

The last sentence of the quoted paragraph indicates that as with the MPC over in London, at least some members of the FOMC are ready to start tightening policy settings very soon.  Like the BoE, the Fed is unlikely to proceed with an actual rate hike before the end of 2014 -- but it seems improbable that we'll get to the end of Q1/2015 without one or both banks starting to tap on the brakes.