MPC division sends pound soaring

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The Independent Online
THE POUND soared on the foreign exchanges yesterday after the Bank of England revealed that only the casting vote of Eddie George, its Governor, had prevented a rise in interest rates last month.

The Bank's Monetary Policy Committee (MPC) was evenly split, four-four, on whether or not the cost of borrowing ought to rise, having voted five- three against a rise in January. Mervyn King, the deputy governor in charge of economics, switched sides in February, forcing the Governor to use his casting vote.

Minutes of last week's MPC meeting will not be published until April, but as the Bank took no action, the committee almost certainly remained split.

The news sent the pound more than two pfennigs higher to DM3.02, while the sterling index against a range of currencies climbed 0.5 to 106.1. This was its highest since last July.

Some analysts stuck to the view that there would turn out to be no need for a further interest rate increase. Figures this week showing manufacturing output in the doldrums lent support to their view that the economy is slowing fast enough to keep inflation on target.

The Engineering Employers' Federation, publishing its Budget submission yesterday, pleaded for a halt to the policy tightening. It said that rates did not need to climb any further, adding: "Economic management should ... endeavour as far as possible to reverse the rise in the pound."

But other economists said the very fact that the Bank was delaying a necessary increase was to blame for the jump in the exchange rate. "They have impaled themselves on the fence," said Paul Mortimer-Lee, chief economist at Paribas. "The continued expectation of a policy tightening is what is keeping the pound strong."

The minutes published yesterday suggested that the two camps on the committee had moved further apart last month. Each side put forward several arguments in favour of their preferred course of action.

The hawks - Alan Budd, Willem Buiter and Charles Goodhart, along with Mr King - said domestically generated inflation was running too high for the 2.5 per cent inflation target to be hit once the one-off effect of the strong pound on import prices had worn off.

They also emphasised the risk of accelerating pay growth, and pointed out that the Bank's "Inflation Report" had shown the underlying inflation measure climbing above its target by late next year.

"Failing to raise interest rates at a time when the central projection of inflation two years ahead was above target would risk damaging the credibility of the MPC process," the minutes report them arguing.

On the other hand, the doves - Mr George, David Clementi, DeAnne Julius and Ian Plenderleith - said there were clear signs growth had begun to slow. In addition, the economic picture was too uncertain to justify an immediate increase. It would be better to wait and see what happened over the next few months.

They too had an argument based on credibility - that it would be damaged if a rate rise now had to be reversed before long because of a sharper than expected downturn.

But one factor that did boost the MPC's credibility was the fact that the internal Bank members had not all voted together. Although both Mr George and Mr King had earlier given firm assurances that the four Bank executives did not vote as a block, February's split was the first demonstration of this independent-mindedness.

Outlook, page 25