A more hawkish mood and continuing deep divisions within the Bank of England were confirmed yesterday when the publication of the latest minutes of the Monetary Policy Committee (MPC) revealed a four-way split.
While the MPC left the quantitative-easing programme of directly injecting money into the economy at £200bn and the Bank Rate at 0.5 per cent at its February session, there was "a wider than usual range of views among committee members about the outlook for growth", which reflected a "highly uncertain" outlook for growth.
The pound jumped on hopes that interest rates may rise before the expected rise in May; recent events in the Middle East, which threaten another spike in the oil price have also strengthened sentiment towards a rate rise sooner rather than later.
Another member of the committee, the Bank's chief economist Spencer Dale, has joined two external members in voting for a rate rise, and the minutes acknowledged a general swing towards tightening. "Of those members not favouring a rise in bank rate, some thought that the case for an increase was nevertheless growing in strength," they said.
The minutes showed that, for the first time in the MPC's 14-year existence, it split four ways on policy at the February meeting, with one member voting for a further boost to the quantitative-easing programme, two voting for a 0.25 per cent rise in rates and one other member voting for a 0.5 per cent hike. Overall, the committee has been edging towards a tougher stance on policy for the past few months, though the shock 0.5 per cent contraction in GDP in the fourth quarter of last year seems to have stayed the committee's hand for now.
A rise in inflationary expectations and further pressure on commodity prices are the main "upside" risks to inflation staying above target. The minutes repeat the Bank forecast that inflation will peak at between 4 per cent and 5 per cent this year, before falling back to the 2 per cent target later in 2012.
Leading the hawks again was Andrew Sentance, an external appointment who has argued for rate rise since last summer. Echoing a recent speech in which he warned that failure to raise rates modestly at an early point might mean larger, more dramatic rises later, on this occasion he called for a 0.5 per cent rise in Bank Rate from its current historic nadir, where it has stood since March 2009.
Mr Sentance "thought that there was mounting evidence that firms were able to pass on cost increases to the prices they set and noted also that domestic demand had been growing for some time".
With another external member, Martin Weale, and now Mr Dale, the three judged that "the level of demand consistent with achieving the inflation target might be lower than previously thought". Mr Weale and Mr Dale opted for a 0.25 percentage point rise. The committee voted by six to three to leave rates on hold.
Opposed again was Adam Posen, who argued that inflationary expectations – a key danger signal for the Bank – were not resulting in inflationary pay rises and that a further £50bn boost to quantitative easing was needed to see inflation on target. There was a eight-to-one decision to leave it on hold.
The majority committee view was put by David Miles yesterday. He said the Bank could bring inflation down rapidly, but he was "very sceptical about whether it is desirable" because it would destroy productive capacity and worsen long-term inflationary prospects.
Meet the MPC...
1. Adam Posen
Intellectually confident, Mr Posen is not the type to mind finding himself in a minority of one. He has voted to boost QE by £50bn, in effect a rate cut, every month since October.
2. Charles Bean
Before this year Mr Bean seemed more dovish than most but this month he has sounded hawkish on commodity prices.
3. Spencer Dale
Showed his hawkish tendencies in an interview with this newspaper last year in which he said: "Now, we can come up with all sorts of clever and real reasons to explain our view, but at some point people will say 'inflation just seems higher than it used to be' and that is a very substantial risk". He voted against a further extension of QE at the end of 2009.
4. David Miles
Constantly dove-like in his outlook, and in 2009 twice voted for larger dose of QE than colleagues. He has never voted for a tightening of policy.
5. Mervyn King
In his keynote speech at Newcastle the Governor abandoned his usual even-handedness and made a strong case for keeping rates low. Conspiracy theorists view his reluctance to tighten policy as part of a plan to support George Osborne's fiscal austerity programme.
6. Paul Fisher
As far as one can tell from his public utterances, Mr Fisher, the Bank's executive director for markets, cleaves to the King view of the world.
7. Martin Weale
A more surprising hawk, as Mr Weale's previous work as director of the respected National Institute for Economic and Social Research suggested he was more relaxed about the possibility of inflationary pressures emerging. He may be following Maynard Keynes' famous adage about facts changing minds.
8. Andrew Sentance
Mr Sentance has pursued a lonely odyssey in favour of monetary tightening since June 2010.
9. Paul Tucker
Inscrutable really. As the deputy governor responsible for financial stability, he may subconsciously consider the impact higher rates might have on the bank. Low politics might suggest he wants to keep rates low to gain favour with George Osborne as Mr King's succession in 2013 approaches.Reuse content