Bank of England split widens over interest rates

Some say the Monetary Policy Committee doesn't know what it's doing. Its latest minutes won't convince them otherwise...

by James Taylor
Last Updated: 19 Aug 2013
The Bank of England Monetary Policy Committee has just published the minutes of its latest meeting, when it voted to keep interest rates at 0.5% - and it turns out there's now three of the nine-strong committee in favour of raising rates. Even some of those who voted to hold fire think the case for higher rates is stronger than it was - which makes an imminent hike look increasingly likely. Much will depend on how well the UK economy bounces back this quarter. But perhaps the one thing that jumps out from today's minutes is just how uncertain the economic picture is at the moment. Even these big-brained economists basically can’t agree about what's going to happen next...

With inflation currently running at 4%, twice the Bank's target, there's clearly a growing body of opinion within the MPC that it's time to start hiking rates. Long-time hawk Andrew Sentance again voted for a raise - in fact, he's now in favour of a 50bps hike - and this month he was joined by fellow independent Martin Weale and the Bank's chief economist Spencer Dale. Governor Mervyn King admitted there was a 'wider than usual range of views among Committee members'; indeed, Adam Posen, another MPC member, reckons that far from cutting rates, we actually need to be pumping more money into the economy via QE.

It all hinges, of course, on what's going to happen to inflation. King acknowledges in the minutes that CPI will probably remain above 4% 'for much of 2011' (which means he's going to be writing a lot of letters to George Osborne). But the majority of the MPC still think it will fall back thereafter, thanks to the amount of slack in the economy and the waning influence of temporary factors like tax hikes and commodity price spikes. But he accepts that the outlook has worsened lately - and that various factors could prevent it falling back even next year. In other words, it could go either way.

The MPC itself is part of the problem. If it keeps getting its forecasts wrong and shows no sign of getting inflation under control - i.e. if it gives the impression it doesn't really know what it's doing - this could raise people's future inflation expectations, which may feed through to wage negotiations and pricing and so on.

Then again, King's theory is that the underlying weakness of the economy - including the lacklustre job market and the increasing reluctance of consumers to part with their cash ahead of the imminent cuts - will stop that happening. We suspect this is probably right. But it's clear that the picture is looking increasingly complicated. As Merv clearly recognises, he may be completely wrong.

All eyes will now be on the revised Q4 GDP growth figure, out this week, and then the Q1 figure. If the former is revised up, and the latter shows a big rebound after the snow disruption, the pressure will really be on the Bank to raise rates. But if growth is still quite limp - and so far the indicators are a bit mixed - Merv's 'wait and see' case will be a lot stronger. Either way, there's clearly going to be some 'healthy debate' chez MPC in the coming months.
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