Money: even the Bank can't handle it

The Bank of England's monetary policy committee is split three ways on interest rates - showing that even the experts can fall out over cash.

by
Last Updated: 31 Aug 2010

While the July meeting ended with a decision to hold interest rates at 5%, this was the first three-way split on the direction of rates since May 2006 – with the bank wrestling with the dilemma of how to deal with a slowing economy at a time when inflation is rising.

Indeed, such an extreme split is unusual, and is due largely to differences of opinion over what is the greatest threat – the cost of borrowing or inflation. Those who feel that money is too expensive want to cut interest rates, in order to stimulate the flow of capital and promote economic growth. But if they cut rates, inflation is likely to go up, which could be critical at a time of huge upward pressure from the cost of food and fuel.

It’s no easy task for the MPC. In yesterday’s meeting, renowned dove David Blanchflower voted for the 10th month running to cut interest rates from their current 5% level, in a bid to prevent recession. Tim Besley voted to raise them, to stamp down on inflation. The other seven MPC members sat on the fence and voted for no change.

The minutes of the meeting claimed that sticking at 5% as the economy slowed was ‘arguably already sending a strong signal of the MPC’s commitment to reducing inflation’. They also contained a hint that rates may soon be cut, suggesting any change in rates would be better communicated in August.

Increases in the Bank Rate, the minutes said, would be potentially tricky in the current economic climate, with low confidence and a fragile financial sector. Still, the very fact the MPC was split has led some to believe that a rates rise may be back on the agenda.

The net result of this, say most analysts, is that the rate is likely to stay at 5% for some time. And even if rates do start to come down, there's no guarantee that the lenders will pass on reductions to their customers. As things stand, they are more likey to hang on to the savings in order to re-capitalise. Bah humbug!

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