MPC 8-1 split on interest rates

23-01-2008

MPC 8-1 split on interest rates
The Bank of England's monetary policy committee (MPC) was split this month on the future of interest rates.

At the body's meeting on January 9th and 10th, the members voted eight to one to hold interest rates at 5.5 per cent after December's 25 basis point cut.

The minutes from the meeting released today reveal the MPC was concerned about the effect of cutting interest rates for two months in a row – potentially giving the impression they had taken their eye off inflation in favour of boosting the economy.

"Reductions in Bank rate in two successive months might, given the current conjuncture, encourage observers to think the committee was focused more on stabilising demand than meeting the inflation target," the minutes stated.

The MPC also wanted to hold off on any rate cut until they had the Bank's February inflation report, as concerns mounted the consumer prices index (CPI) may rise off the back of high oil, gas and food prices.

It is the MPC's target to keep CPI below two per cent.

"The upside risks to inflation from supply-side developments had increased in each of the past two months, largely reflecting changes in food and energy prices and the exchange rate."

One member voted for a 0.25 percentage points cut in interest rates, citing an increased risk of "a sharp and persistent slowdown".

Speculation is now rife the MPC will cut rates when it meets in February, although not as drastically as the US Federal Reserve's emergency 75 basis point cut yesterday.

Jonathan Loynes, at Capital Economics, said: "We suspect most members expected to vote for lower rates in February even before the recent steep falls in stock markets and aggressive response from the US Fed.

"But there was little indication that the committee expects to bring interest rates down very rapidly beyond February."

He added: "Provided markets stabilise, however, it still looks likely the committee will prefer to bring rates down at a relatively measured pace – perhaps one 25 basis points cut per quarter – as it grapples with the opposing forces of weakening activity and rising inflation."

Mr Loynes went on to predict UK rates will eventually fall to as low as four per cent.

Meanwhile, the British Chambers of Commerce (BCC) is calling for a cut to five per cent.

David Kern, economic adviser to the BCC, said: "The minutes confirm our assessment the MPC has to balance downside risks to growth and upside risks to inflation but events since the meeting, particularly the Fed's move yesterday, support our assessment a cut in rates would have been preferable.

"We urge the MPC to move as quickly as possible to a five per cent interest rate level."

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