Monetary policy committee split on interest rates

Wednesday, 21 May 2008 9:24 AM

The monetary policy committee (MPC) voted eight to one in favour of this month's interest rate hold - with one member voting for a quarter percentage point cut.

After last month's three-way split from the Bank of England's MPC, a coming together to focus on tackling inflation had been expected.

The one dissenting voice, David Blanchflower, had similarly been expected to push for an interest rate cut, given comments made to press in the run-up to the decision.

Mr Blanchflower claimed in the meeting factors pushing up inflation were beyond the control of the MPC and the current period of above-target inflation would have "little tendency to persist", so an interest rate cut was necessary to aid the economy.

However, the majority - according to the minutes of the meeting released today - found: "Although economic activity was likely to slow, the committee had judged that some slowing in the growth rate of output was likely to be necessary for inflation to settle close to the target around two years ahead.

"A further reduction in Bank rate this month could create the impression that the committee was trying to stabilise output growth rather than maintaining its focus on the inflation target."

The MPC discussed whether the slowdown due to rising prices and the credit crunch would pull down inflation - or whether the economy was strong enough to survive the current storm.

The weakening property market was also seen as a threat to the economy.

As in the predictions in the May Inflation Report, the MPC admitted inflation would stay high in the coming months, and attempts to bring it down swiftly would hit the economy.

However, inflation is expected to fall to two per cent by 2011.

Predictions for economy see GDP growth "slowing markedly. reflecting subdued real income growth, tighter credit supply and weaker world activity".

"The minutes of the May MPC meeting largely reinforce the view that the Bank of England is 'wait in see' mode for an extended period as it monitors growth and inflation developments," said Howard Archer at analysts Global Insight.

"With inflation likely to approach four per cent this summer, the Bank of England will tread extremely carefully on the interest rate path.

"Nevertheless, we believe the Bank of England could yet trim interest rates from 5.00 per cent to 4.75 per cent in the final months of this year in reaction to very weak economic activity, elevated concerns about the housing market and ongoing tight credit conditions."

He added: "Further out, we expect interest rates to fall to 4.5 per cent by the end of 2008 or early in 2009, and it is still very possible that they will ultimately fall further in 2009 as an extended period of very weak economic activity increasingly dilutes underlying price pressures and leads inflation to retreat significantly."

Daniel Barnes

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