MPC split 8-1 as interest rate hike discussed
The Bank of England's monetary policy committee (MPC) was split eight votes to one on holding interest rates at five per cent at their June meeting with the prospect of an interest rate increase being discussed.
The Bank of England's monetary policy committee (MPC) was split eight votes to one on holding interest rates at five per cent at their June meeting – with the prospect of an interest rate increase being discussed.
The one dissenter – David Blanchflower – argued an interest rate cut could be afforded as the slowing property market and falling house prices would bring down inflation.
However, the majority of the committee saw the rising threats to inflation – confirmed yesterday to hit 3.3 per cent – and the prospect of an interest rate cut was discussed.
"If there were a serious threat to medium-term inflation expectations then a pre-emptive rise in rates would be appropriate. Delay would only increase the eventual costs of bringing inflation back to target."
However, the consensus from the June meeting was that a rate hike was not needed as medium-term inflation expectations "remained anchored" and there was the fear a surprise increase could shock the markets into thinking the inflation problem is worse than it is.
The MPC now expect inflation – fueled by rising oil, fuel and food prices – to peak later this year before falling back.
This view was maintained yesterday by Bank governor Mervyn King in his open letter to the chancellor after inflation hit 3.3 per cent.
He also hinted interest rates may now not come down for as much as a year.
However, he was clear on the uncertainties the UK economy faces.
The MPC minutes also highlighted the uncertainty: "The speed and depth of the slowdown remained difficult to judge. Housing market conditions had deteriorated sharply and the effects of the ongoing tightening in credit conditions were still working through to the real economy."
Howard Archer, chief Uk economist at Global Insight, said: "There are signs that the MPC is becoming more divided on the future course for interest rates, but the overall impression is that the Bank of England is in no hurry to move interest rates, given the current major uncertainties surrounding both the medium-term inflation and growth outlook.
"This was also the impression that we got from Mervyn King's letter to the chancellor about inflation moving more than one percentage point above its two per cent target level in May."
He added the minutes support the view interests will not be coming down "any time soon" and any short-term move will be upwards.
