Former MPC member defends 0.25% rate cut

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The Independent Online

A former member of the Monetary Policy Committee defended the Bank of England yesterday, as new data seemed to back its controversial decision not to cut interest rates by a half-point on Tuesday.

Charles Goodhart, who served on the MPC until last year, said a quarter-point cut was the right decision given the strength of the UK economy.

His comments came as the Organisation for Economic Co-operation and Development said Britain was growing faster than any other industrialised economic country.

Meanwhile, minutes of the MPC meeting two weeks ago showed there was discussion of a hike in rates, indicating the MPC had had to U-turn sharply to cut rates by 0.25 per cent.

There was surprise in the City on Tuesday that the Bank had waited 24 hours to follow the Federal Reserve and then reduced rates by only half the amount of the US cut.

Professor Goodhart said the UK was growing "considerably more strongly" than the rest of the world. "This suggests more of a potential upturn in inflation than elsewhere, which makes a quarter-point cut a very considered one," he said.

The Bank is angry at being accused of failing to co-ordinate its rate cut when there was in fact no co-ordination. Monday's cut by the European Central Bank came as a complete surprise as Wim Duisenberg, the ECB president, had said only hours earlier he believed the attacks were mainly a US issue.

The nine members of the MPC held a face-to-face meeting lasting the whole morning before announcing their decision at noon. A Bank source said: "We could have shot from the hip or got up before dawn or the third choice ­ do something that gave an opportunity for proper discussion and make a decision at the standard time."

At the 6 September meeting, the MPC voted eight to one to hold rates at 5 per cent. Only the long-standing dove Sushil Wadhwani called for a cut. The key issue troubling MPC members was the continued eagerness of consumers to visit shops and buy homes despite a recession in manufacturing, mounting job losses and a sharp drop in business investment. But the MPC decided that reversing August's rate cut so soon"would surprise the markets ... and imply an unrealistic degree of fine-tuning", the minutes said.

Meanwhile, the OECD think-tank said the UK economy was growing at 2.1 per cent a year, compared with an average of 0.1 per cent for its 30-nation area. The US is growing at 1.2 per cent. The Treasury said City economists had cut their forecast for UK growth this year to 2.1 from 2.2 per cent last month.