Split on Bank rate

Jul 24 2008 by Iain Laing, The Journal

FEARS over runaway inflation prompted a Bank of England rate-setter to vote for a hike in the cost of borrowing this month.

Monetary Policy Committee (MPC) member Tim Besley voted to raise interest rates by 0.25%, a move he said was necessary to “ensure the committee’s credibility” in the battle against inflation, which is currently at 3.8%, according to the minutes of the last monthly meeting released yesterday.

Seven other members of the MPC, including Governor Mervyn King, voted to hold rates at 5% at the meeting two weeks ago, while Professor David Blanchflower argued for a 0.25% cut. It was the first three-way split on rate direction since May 2006, with Mr Besley’s increase vote the first since July last year.

In a sign of the increasingly difficult balancing act being performed by policymakers, the minutes of the meeting recorded that for all committee members the decision to keep rates steady was a “difficult one”. MPC members discussed whether raising interest rates could send “a strong signal” that it was focusing on inflation and remained determined to bring it back to target in the medium term.

But there were a number of arguments for keeping rates steady, the minutes showed, including more gloomy surveys on economic activity during the month which made it possible that higher interest rates to slow down inflationary pressure “may not be necessary”.

The minutes said an increase in rates in the current circumstances “could impart a downward momentum to the economy”. And a rate change in July would have been “a surprise”, given that credit and other financial markets remained fragile.