Bank of England MPC still split four ways

No change in the MPC's position last month. But the interesting question is what will happen next time round...

by James Taylor
Last Updated: 19 Aug 2013
The March minutes of the Bank of England's Monetary Policy Committee meeting show there's still a four way split, just as there was the previous month: six of the nine voted for no change in interest rates (though one of these wants to boost QE again), while three voted for a hike (one for 0.5%, two for 0.25%). This isn't entirely surprising. But with inflation now up to 4.4%, and widely expected to head north of 5% in the coming months, the Bank is under increasing pressure to increase rates; some claim its credibility is already shot to pieces. So whether those six will be able to hold their nerve this month remains to be seen...

The majority of the MPC (including Governor Mervyn King) continue to believe that the factors behind the recent spike in inflation - notably oil and food prices - are temporary. And because the UK economy is still in a pretty feeble state, with unemployment rising and wage growth more or less static, the underlying inflation trend is downwards. So although the headline figure might keep climbing for a while, it will eventually start falling back towards the Bank's 2% target of its own accord. There's also the argument that raising interest rates wouldn't solve any of the problems causing inflation to spike, and (by increasing mortgage payments) would actually leave many of us even poorer, thus depressing the economy even further.

It's an argument that makes a lot of sense, and many independent economists appear to agree with it. But with inflation more than double target and rising, the pressure on the Bank is mounting - not least because it has consistently underestimated how bad inflation would be over the last year. So it now finds itself with a credibility problem; it's hard to argue that you've got things under control when all the numbers are moving against you. And when people are feeling poorer - PwC reckons 'everyday' inflation is currently running at 5.4% - you can't blame them for being sceptical.

The economic argument for doing nothing may not have changed significantly when the MPC meets this month; King himself largely predicted this path. But the political argument is getting more difficult; and like it or not, the individual economists on the committee can't be immune to that. It'll be fascinating to see whether any of the six currently opposed to a hike will succumb to that pressure in April.

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