Inflation fear kept rates pegged
May 22 2008 by Iain Laing, The Journal
FEARS of mounting inflation appear to have outweighed those of slowing economic growth in the Bank of England’s near unanimous decision to keep interest rates steady this month.
Minutes from the Bank of England’s Monetary Policy Committee (MPC) meeting showed members voted eight to one in favour of holding the rate at 5%.
The minutes revealed most committee members felt a .25% reduction would make it harder to get inflation back to its 2% target figure despite evidence of slowing economic activity.
The official cost of living index rose by 3% last month, and is expected to rise further this year thanks to soaring fuel and food prices.
A flurry of poor economic data earlier this month, including historic lows for manufacturing and service sector activity and the first fall in house prices for more than two years, had piled pressure on the MPC to make a back-to-back rate cut to 4.75%.
But the minutes said: “A further reduction in bank rates this month could create the impression that the committee was trying to stabilise output growth rather than maintaining its focus on the inflation target.”
Bank of England Governor Mervyn King has to write a public letter to Chancellor Alistair Darling if inflation rises above 3%, explaining what has happened. One member of the committee voted for a .25% rate cut.
David Blanchflower felt it was “important to look through the short-term spike in inflation” and instead concentrate on the “current and prospective weakness of demand”.
He argued that the current period of above-target inflation would have little tendency to persist.
The committee is walking a tightrope between balancing the risks to the economy with its mandate to keep inflation at 2%.
The UK economy grew at its slowest pace for three years in the first quarter of 2008, but consumers are being battered by relentless rises in household bills and more expensive mortgages.
The committee cited a number of factors likely to impede economic growth, including falling house prices, lower consumer spending and a continuing tightening of credit.
“Output growth had already begun to slow, and business surveys suggested that a further moderation was in train,” the minutes said.
But the committee made it clear that the inflation fears had won the battle over the prospect for a slowing economy.
It also showed little appetite for a further rate cut in the short term.
