Bank of England still split on interest rate

20-08-2008

Bank of England still split on interest rate
The Bank of England's interest rate setters were again stuck this month in a tripled-headed stand-off over the future of the cost of borrowing

For the second month running, seven members of the monetary policy committee (MPC) voted to maintain the status quo of interest rates at five per cent, while one member (Tim Besley) voted for an increase of 0.25 per cent to fight off inflation and a further member (David Blanchflower) voted for a cut – minutes from this month's meeting released today reveal.

The dispute stems from the impasse the UK economy is stuck in.

On one side the threat of inflation – the Bank's primary concern – is high and is traditionally tied back to the two per cent target by interest rises. However, the ogre of recession darkens the horizon and is usually confronted by interest rate cuts.

Amid the financial forces tearing the economy, the majority of the MPC opted to hold firm – under the assumption recent hikes in fuel, food and energy prices will not be maintained and inflation will make a fall.

They take the view inflation will rise further but fall as the economy slows.

The minutes stated: "Most members of the committee judged the current stance of monetary policy was broadly appropriate and that Bank Rate should be maintained at five per cent this month.

"Inflation was likely to move further above the target in the coming months. The outlook for activity growth had continued to worsen, but some build up in the margin of spare capacity was likely to be necessary to ensure that inflation returned to the target in the medium term."

The minutes show the MPC saw cutting rates would help to "ameliorate the worst of the downturn in activity", but would seen out the message the rate setters were more bothered by the economy than inflation.

"In that case, the risk of elevated inflation persisting, and perhaps rising further, would increase," the minutes revealed.

However, the body warned a rate rise "might adversely affect business and consumer confidence".


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