Bank rate-setters divided

Apr 24 2008 by Iain Laing, The Journal

THE Bank of England’s dilemma between inflation fears and staving off a slowdown has been highlighted by news that rate-setters were split three ways for the first time in nearly two years.

Minutes of the Bank’s Monetary Policy Committee (MPC) meeting two weeks ago revealed that six of its nine members voted for a quarter-point interest rate cut to 5%.

But two members voted to keep rates unchanged due to inflation pressure from soaring oil costs, while another – David Blanchflower – called for a 0.5% cut due to fears over a sharper than expected slowdown.

The three-way split is the MPC’s first since May 2006. The committee is walking a tightrope between balancing the risks to the economy with its mandate to keep inflation at 2%. The official measure of inflation, the Consumer Prices Index, is currently above target at 2.5%.

The majority of the committee, which included Bank Governor Mervyn King, argued that it was necessary to lower rates by 0.25% to help offset the worsening conditions in credit markets feeding through to households and reduce the risk of an unexpectedly sharp slowdown later in the year.

But Prof Blanchflower pressed for an even greater cut to prevent the UK slipping into the kind of slump currently faced by the US economy.

He said the MPC should give more weight to forward-looking surveys forecasting a slowdown which could provide an early warning that shocks to the financial and property sectors were being transmitted to the rest of the economy.

But the MPC’s hawkish members, Tim Besley and Andrew Sentance, said interest rates should be held unchanged at 5.25% because the inflationary pressure from a weakening pound and oil costs soaring to record levels above US$100 a barrel had fed into rising output prices.

They argued that a cut in April would send the signal that the committee was responding to concerns over a weakening housing market rather than focusing on the inflation target.

A survey by the Halifax showed average house prices falling by 2.5% in March, the biggest month-on-month fall in more than 15 years.

They added that better-than-expected economic data did not justify a cut and urged the MPC to wait until its next quarterly forecast.