Bank members split on rates amid inflation

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The Independent Online

Bank of England policymakers were split over the latest interest rates decision for the first time in more than a year amid fears of persistent inflation, it was revealed today.

Minutes of the June rates meeting showed a surprise seven to one vote after Monetary Policy Committee (MPC) member Andrew Sentance said the cost of borrowing should rise by 0.25%.

Rates were kept on hold at their historic low of 0.5%, but the revelation of a disagreement among the MPC - the first on rates since February 2009 - highlighted increasing concern at stubbornly high inflation.

The vote result sent the pound higher, up 0.6% to 1.49 dollars and 0.5% to 1.21 euros.

The MPC has been unanimous in keeping rates on hold for many months, but the threat of above-target inflation has increasingly become a cause of concern among some members.

Today's minutes showed that Mr Sentance believed the wider economic conditions were failing to dampen inflation.

He recently wrote in the Sunday Times that he felt rates may need to rise this year due to the "resilience" of inflation.

According to the minutes, he deemed the momentum of recovery so far to be enough to create slack to absorb a rate hike.

"Despite current uncertainties, for this member, it was appropriate to begin to withdraw gradually some of the exceptional monetary stimulus provided by the easing in policy in late 2008 and 2009," the minutes showed.

Consumer Prices Index (CPI) inflation has been above the Bank of England's 2% target since last November, reaching 3.4% last month.

But this was down on the 3.7% seen in April and marked a bigger-than-expected fall in a sign that inflation may be at last easing back as predicted.

The minutes revealed most members of the Bank voted to keep rates on hold this month as they believed the "balance of risks were insufficient to warrant a change in the stance of monetary policy".

The nature and scope of yesterday's Budget was also unknown at the time of the meeting, which reinforced the decision to hold policy unchanged.

Economists said news since the rates decision should have further calmed MPC worries over inflation.

Budget tax hikes and lowered growth forecasts suggest inflation will fall back further and see interest rates kept at their record low "for some time yet", said Vicky Redwood at Capital Economics.

She warned that rather than tightening monetary policy, the Bank may even be forced to increase support for the economy after yesterday's Budget blow to spending and taxes.

While the MPC has remained unanimous this month on halting the £200 billion quantitative easing programme, Ms Redwood expects another "£50 billion or so" to be announced later this year or early in 2011 to combat disappointing growth.