It is not that the doves on the MPC, especially Sushil Wadhwani and DeAnne Julius, are wrong when they point to all the influences bearing down on inflation.
On the contrary. The strong pound has kept the prices of imported goods down and ensured that manufacturers continue to struggle. More intense competition, thanks to the launch of the euro and the more transparent markets it will bring with it, and the impact of the Internet, makes the long-term inflation outlook more favourable. But it is important to realise that these have only just begun to influence prices, and are unlikely to have a big impact for another three or four years - beyond the Bank of England's horizon for its inflation target.
Meanwhile, there is ample evidence that there is a danger of inflation heading past 2.5 per cent in two years' time - soon enough for a small increase in rates now to prevent it. Some of the MPC's critics accuse it of making manufacturing industry in the North pay the price for cooling down the overheating London housing market, but that is simply wrong. There are many other early warning signals.
The jobs market is so tight, for example, that businesses cannot find enough temporary secretaries, never mind computer programmers. Growth of output is faster than economists believe is sustainable for long, with manufacturing and services alike sharing in the economic recovery. Much the same pressures on the continental European economy prompted the European Central Bank prudently to move rates up by a half a point.
With Gordon Brown presenting his pre-Budget report next Tuesday, the MPC also had to keep an eye on what is likely to happen to the Government's tax and spending plans. For all the Chancellor's insistence that he will not spend the contents of his war chest and that he will stick to his Golden Rule (borrow only to invest), fiscal policy is likely to be looser rather than tighter between now and the next general election. If tax and spending policies will be giving a bit of a boost to growth, the Bank of England needs to lean a little in the opposite direction. And, by the by, what a healthy change that makes from when interest rates used to change at Budget time, or another politically convenient point.
Even if the worst fears of the financial markets are realised, interest rates will climb to just 7 per cent at the end of next year. Many experts suggest that the peak will be 6.5 per cent. In any case, this would be well under half the peak rate in the last business cycle.
While not exactly welcoming yesterday's decision, most business organisations sensibly opted not to complain. Those die-hards claiming that the MPC is ignoring the needs of beleaguered northern manufacturers need to brush up on their history. Those who point to a brighter inflationary future, meanwhile, must guard against overlooking the present danger signals.Reuse content