The Bank is itching to raise rates but needs evidence it wouldn't quash fragile business confidence

How quickly the world can change. Three months ago, three of the Bank of England’s nine rate-setters were voting for an increase in interest rates. Now, the Bank’s minutes revealed today, none of them are and discussion has turned to restarting quantitative easing (QE).

If you think policymakers are fickle, though, try the markets. Earlier this year, traders reckoned it was a nailed-on certainty that rates would have started rising by the May just passed. Now, they are pricing policy to be unchanged until the middle of 2013.

Events have changed, of course, and when they do so, as John Maynard Keynes famously remarked, “I change my mind”. But the one lesson that can be taken is that forecasts must be taken with a pinch of salt. As Sir Mervyn King is fond of saying, the only thing he can promise about his forecasts is that they will be wrong.

Reading policy nowadays is all about reading mindsets. And the Bank has, to my mind, been dropping a few clues recently. As much talk as there may now be about restarting QE, the impression seems to be that it will remain just talk unless Europe’s leaders plunge the world back into crisis.

As for rates, the Bank is itching to raise them but needs evidence that doing so would not quash fragile business confidence and trigger a severe slowdown. It nearly moved in February before data was published showing the shock contraction in the final quarter of last year. And, this time, the rising clamour of voices on the MPC calling for a rate rise has been silenced, again by worries about growth – this time global.

For the time being there is no need to risk spooking businesses with the threat of a rate rise. The global slowdown has been confirmed by weak numbers last month from the US and, this week, from Germany and the eurozone. According to the Bank’s agents, business confidence is already ebbing away and hiring intentions are falling.

Today’s jobs data, which showed that unemployment rose from 7.7pc to 7.9pc in the three months to June, is equally unsettling – but is still lower than the 8.2pc official forecast for this year as public sector cuts come through. Latest wage settlements, at 2.2pc, are not about to spark an inflation surge.

But I would not be surprised to see rates start to rise early next year, assuming the world isn’t plunged back into crisis. The Bank has already lowered its estimates of spare capacity twice, which means any pick-up in growth will feed more rapidly through to inflation.

It has said it expects pay rises to accelerate as employees demand catch-up for the sub-inflation settlements of the past two years. Companies may also start to rebuild their margins, it warned today, following a big increase in costs. “Margin levels in consumer-facing sectors probably remained below their pre-recession levels, and any attempt by those firms to rebuild their margins could put upward pressure on inflation,” the agents’ report said.

The squeeze on households will also ease next year as inflation falls back beneath wage deals, allowing for real-terms pay rises.

In his letter of explanation to the Chancellor on Tuesday for soaraway inflation, Sir Mervyn said there is “a limit to what monetary policy can do” – a message interpreted as saying more QE is unlikely. In the minutes, the suggestion was that QE would only be considered if “some of the downside risks [were] to materialise”. Those downside risks were all to do with the eurozone triggering another crisis rather than domestic.

It took three months for the Bank’s hawks to abandon their position and turn the direction of monetary policy on its head. It may seem counter-intuitive, but it would take a brave man to bet against policy flipping round again in the next three months.