Despite mounting pressure from rising inflation and an intense internal debate on their next move, the Bank of England's Monetary Policy Committee is almost universally expected to leave interest rates at 0.5 per cent today, and the quantitative easing programme at the current £200bn.
The Bank will be forced to produce new, higher forecasts for inflation and the Governor, Mervyn King, will have to publicly explain himself at the Bank's Inflation Report press conference on Wednesday. That is scheduled for the day after inflation is expected to reach 4.3 per cent, a two-year high, with the largest monthly jump in over 20 years.
Two former members of the MPC, Deanne Julius and Tim Besley, said yesterday that they would be inclined to back a rise in rates at this point. Speaking at a forum organised by Fathom Consulting, Mr Besley said that he would have expected a"normalisation" of interest rates to have begun by now; Ms Julius said that the trend towards higher inflationary expectations was "worrisome" and that it was "fanciful" to attempt tocontrol domestic inflationary pressures in isolation from external shocks, such as the recent jump in world commodity prices.
Although many City economists recognise that the Bank may wish to send an early signal that the interest rates cycle is about to turn, especially in advance of what is expected to be a dramatic jump in the inflation figure next Tuesday, the consensus is that the May, August and November meetings of the MPC are much more likely to see a rate hike than the session that ends today.
At the last meeting of the MPC in early January two members voted for a 0.25 percentage point rise, a "swing" of one vote towards the more hawkish potion, as new member Martin Weale joined long-standing hawk Andrew Sentance. The MPC's January meeting took place before they saw the shock 0.5 per cent contraction in GDP in the last months of 2010; but Mr Weale has since argued that his decision would have been much the same in any case, and survey evidence suggests that business has bounced back in January.
Adam Posen, another external appointment, voted for a modest expansion in the QE programme. However the Governor, Mervyn King, has been outspoken in arguing that the Bank should see through the short-term spike in inflation caused by the decline in the value of sterling, booming oil and food prices, as well as rises in VAT.
The broad view among City economists is that inflation in January will jump to around 4.2 per cent, from 3.7 per cent, one of the largest monthly rises in thirty years. As Mr King acknowledged in a keynote speech in Newcastle last month, inflation will peak at between 4 and 5 per cent, probably in February or March. It will not return to the 2 per cent target until around the spring of 2012.Reuse content