Sir Eddie forced to use casting vote as MPC splits over interest rates

Click to follow
The Independent Online

The Monetary Policy Committee split down the middle when it voted to keep rates on hold at 6.0 per cent a fortnight ago, it emerged yesterday.

The Monetary Policy Committee split down the middle when it voted to keep rates on hold at 6.0 per cent a fortnight ago, it emerged yesterday.

Sir Eddie George, the Governor of the Bank of England, had to use his casting vote at their meeting on 7 and 8 August as the nine MPC members decided by the narrowest of margins - five votes to four.

The minutes, published yesterday, showed the committee divided on almost every key issue, giving little clue to the future path for rates.

Sterling rose immediately after the release of the minutes, as the financial markets interpreted the close vote as a sign that the UK had not reached the peak of the interest-rate cycle. The pound later eased as the market focused on the renewed strength of the dollar against the euro.

Some economists in the City agreed that the odds had shortened on a hike next month. But others said the views of the hawks and the doves were now so entrenched that the MPC had in effect adopted a "wait and see" stance.

For the second month running, the committee was divided three ways between those calling for an immediate hike, those saying monetary policy was correct or even too tight, and a third group for whom the issues were "finely balanced".

The hawks focused on the strong GDP figure for the second quarter, showing the economy growing at 0.9 per cent. The labour market was tightening, consumer demand was strong and the fall in sterling threatened to import inflation, they argued.

"Given that the balance of risks to inflation was on the upside, and given the market was expecting a modest tightening later in the year, the better course was an immediate increase," the minutes said.

But even this group was split with some members, probably deputy governor Mervyn King and Stephen Nickell, seeing the need for a hike as a close call.

At the other end of the scale, another group - thought to be DeAnne Julius and Sushil Wadhwani - argued an expected improvement in supply-side performance would dampen inflationary pressures. "There was no case for a further rise. Any tightening would also put pressure on sterling's exchange rate," the minutes read.

The middle group - which almost certainly included the Governor, Ian Plenderleith and Christopher Allsopp - agreed that an immediate hike would create "unnecessary" downward pressure on inflation from further sterling appreciation.

Instead, they believed rates should stay on hold but that the fan chart in the August inflation report should show inflation rising above target, which would push sterling higher. "That would not be unwelcome in itself and would avoid the risk of a larger market adjustment if the rate were raised," the minutes said.

Fraser Coutts, UK economist at the independent analysts 4cast, said: "This suggests the committee could remain in rate paralysis mode until the evidence falls firmly on one side or the other."

But Philip Shaw at Investec said firm evidence of a slowdown in consumer demand would be needed to prevent another hike. "If sterling weakens, then September's meeting would be back on the agenda."

Geoffrey Dicks, an economist at Royal Bank of Scotland, said a decision to raise rates would have been a snub to the Chancellor, who had claimed his £43bn July Comprehensive Spending Review would not stoke inflation.

"Sir Eddie spared the Chancellor's blushes," he said. But Michael Portillo, the shadow Chancellor, said the minutes showed the Bank was worried about the inflationary impact of the CSR. "This will set alarm bells ringing among hard-pressed British businesses and homeowners," he said.

Comments