By Jamie McGeever

ORLANDO FL (Reuters) – The Bank of England’s approach to increasing interest rates has changed since its independence nearly a quarter of a Century ago. It is important to remember this in the midst of tightening markets for UK rates.

Apart from economic reasons against aggressive rate-hiking cycles – of which the markets are well aware, as evidenced by the flattening yield curves and other indicators – historical records show that the Bank’s Monetary Policy Committee seldom acts quickly or boldly when raising rates.

15 of the 21 rate hikes since May 1997 were made after at least one MPC policy meeting in which one or more MPC members voted to increase official borrowing costs. Sixteen of the 21 rate increases have been made immediately following a unanimous vote against any change.

MPC voting patterns often indicate that an increase in rates is imminent. This could prove to be an exception.

The rising cost of energy and supply shortages are causing inflation to be the worst in nearly a decade. The UK’s rates market is on fire, and it is expected that the BoE will be the first central bank to increase rates with a sustained and early cycle.

Governor Andrew Bailey said Sunday that Bank of England “will need to act” when faced with rising inflation.

The financial markets are now anticipating a close-90% chance that the benchmark rate will be increased by 25 basis points on November 4th and then 50 basis points in February, following 13 unanimous MPC votes.

Andrew Sentence, a former MPC rate-setter said that “that seems very aggressive.” “I am not certain this is going to occur.”

That’s right, it’s one of the Bank’s most hawkish policymakers in past and present.

Sentance voted twenty times in 56 MPC meeting between 2006-2011 to increase rates. It was the second highest vote of any MPC members since 1997, when the Treasury made the Bank independent. The 30 votes of former Governor Mervyn Kings to increase rates came from 194 meetings.

REPUTATIONAL DAMAGE

The Bank may pull the trigger on next month but it will likely be opposed by others. The MPC has only twice previously voted to maintain rates at their current level and voted to increase them. The tightening cycles were both late, Aug. 2004 and Nov. 1997.

Michael Saunders, Bailey’s MPC counterpart, has also issued rate rise warnings recently. In addition, several large banks have changed BoE calls. JP Morgan UK economists made the announcement Monday. They now forecast a 15% rise in November and a 25% move in February.

These short-dated yields have soared. So far in October, the UK’s 2-year yield rose 30 basis points. This puts it on pace for its largest monthly increase since the Great Financial Crisis.

However, longer-dated yields aren’t as high and yield curves that are significantly flatter point to growing concerns about raising rates right now.

The question remains as to whether Bailey is able convince all of his MPC colleagues to raise the rates next month. Catherine Mann, Silvana Tenreyro and Silvana Menreyro have been pushing back and taking a more reserved tone recently.

Danny Blanchflower was a former MPC member. His argument is that, with the tightening of fiscal policy, increasing rates poses an economic risk. It may also put the Committee in doubt about its credibility.

He warns that any increase in rates soon could seriously harm the MPC’s reputation. “It is likely that there will be a devastating turnaround within a few weeks,” he says.

These are the signs that currency and rates markets are watching out for. Sterling failed to capitalise on the rise in near-term interest rates, and UK rates as well as yield curves are flattening aggressively.

If not November, then could the MPC gift the British people a Scrooge-like Christmas present with a December rate increase?

Sentance says this seems even more unlikely: The Bank of England raised interest rates in December once in 45 years, and that was in 1994.

(By Jamie McGeever; editing by Richard Pullin)