Minutes show MPC split over rate cut

A three-way split appeared in the Bank of England's Monetary Policy Committee (MPC) when it met two weeks ago, it has emerged, potentially reducing the likelihood of further rate cuts in the months ahead.

Minutes of the MPC's meeting this month show the committee voted by a margin of six to three to reduce interest rates by a quarter percentage point to 5 per cent. However, on this occasion the three dissenters fell into two camps. One member of the MPC, the so-called "arch dove" David Blanchflower, voted for a half percentage point cut, in line with his long-term track record. Two, more "hawkish" members of the MPC, Timothy Besley and Andrew Sentance, were evidently more worried about growing inflationary pressures in the economy, and voted for no change.

According to the MPC minutes, Messrs Besley and Sentance were concerned that "inflationary pressures from rising output costs were spreading beyond the energy and food sectors and there was a danger that higher inflation expectations would persist. There was a risk that a premature cut in Bank rate might sustain higher inflation".

Mr Blanchflower said "recent US experience showed... shocks to the financial and property market sectors were being transmitted to the rest of the economy".

The Governor, Mervyn King, and the Deputy Governor Sir John Gieve joined four other members in the majority view that "a reduction in Bank rate now would reduce the tail risk of an unexpectedly sharp slowdown in demand later in the year, which if it materialised might then require a more vigorous policy response in order to hit the inflation target further out".

The Bank has always stressed, since the inception of the MPC a decade ago, that it isn't designed to have a "collective view" but it is rather a collection of individuals invited to form independent judgments about the economy. Nonetheless, the emergence of three "camps" on the committee for the first time since 2006 seemed to confirm the tensions involved in weighing the risks of a recession against inflation. The division was sufficient to confuse City observers, who took markedly different messages from the minutes about the timing of future rate cuts, though all agree the Bank will continue to push rates lower, with the pace partly depending on how quickly the Bank's Special Liquidity Scheme will ease the credit crisis and lower market rates.

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