As growth stumbles and inflation remains stubbornly high, the Bank of England appears to have split three ways on how to solve the dilemma.
According to the latest minutes of the Monetary Policy Committee, one member of the Committee argued for more stimulus via "quantitative easing", the direct injection of money into the economy. So far the bank has printed £200bn to boost spending and cut rates, and it seems to have at least partially succeeded.
On past form, the big spender would be David Miles, an external member appointed last year and, in the classification beloved of journalists and loathed by the Bank, a "dove".
On this occasion it would seem that he contented himself with arguing that the "softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned.
Pay growth had remained subdued and there was little sign of a material pick-up in medium-term inflation expectations. A further modest monetary stimulus would act to offset the softening in demand prospects and make it more likely that the inflation target would be met in the medium term." In plain English, he thinks we're headed for a double dip and another slump.
Balancing him, and determined enough to vote against the Governor, Mervyn King's no change motion, was Andrew Sentance, who stressed: "Inflation was likely to remain above target for some months and there was a risk that medium-term inflation expectations would rise. The resilience of inflation over recent months had suggested that the downward impact of spare capacity could be weaker than expected and this created uncertainty around the extent to which inflation would fall back in the future." Translation: Inflation is about to explode and we'd better stop it now.
Although he did not vote that way, from his interview with The Independent today the Bank's chief economist, Spencer Dale, would appear to have some sympathy with that "hawkish" view. In the event the MPC voted by 7 to 1 in favour of keeping rates and QE where they were, in effect a continuing stimulus to the economy which provides hundreds of pounds in extra spending power every month to families on tracker mortgages, for example. The minutes record that: "On balance, most members thought that it was appropriate to leave the stance of monetary policy unchanged. For them, the weight of evidence from both home and abroad continued to indicate that the margin of spare capacity was likely to bear down on inflation and bring it back to the target in the medium term once the impact of temporary factors had worn off."
Although written in typically restrained central banker-ese, the reality of MPC meetings may be more fraught than they suggest. Former MPC member David Blanchflower complained about "inflation nutters", where "Governor Mervyn King, the old iron fist of the Bank of England, with his hawkish views on rates, dominated the MPC".Reuse content