Split over interest rate decision

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The Independent Online

Bank of England rate-setters were split three ways again this month when they left policy unchanged despite mounting pressure on inflation.







Minutes of the December rates meeting suggested increasing concerns among members of the Monetary Policy Committee (MPC) over inflation after it rose again in November to 3.3%.



They said upside risks to inflation had increased, but added that the majority of MPC members continued to believe economic conditions would bring inflation back to target in the medium term.



Andrew Sentance remained the lone voice calling for a quarter-point rise in rates to calm inflation, while MPC colleague Adam Posen reiterated his vote for another £50 billion in quantitative easing (QE) to support the recovery.



With the majority backing a "no change" decision, rates were held at 0.5% for the 20th month in a row while QE was maintained at £200 billion.













Today's minutes highlight the growing threat of inflation as rocketing fuel costs, energy bills and the impending VAT hike add to the cost of living.



The report showed MPC members "considered the accumulation of news of recent months had probably shifted the balance of risks to inflation in the medium term upwards".



It added the MPC believed firms were already pushing up prices ahead of the VAT hike to 20%, while "there were signs that global pricing pressures had increased over the month".



But members also noted the outlook for both growth and inflation remained highly uncertain, with the euro debt crisis posing a marked threat to the UK economy.



The MPC said the impact on the UK "could be large" if eurozone troubles hit demand for UK exports and may also lead to a further credit squeeze if bank funding dries up.



The Bank warned in last week's Financial Stability Report that the UK was only "partially insulated" from Europe's sovereign debt woes and pointed towards the need for banks to shore up finances to ward off any threats.



Howard Archer, chief economist at IHS Global Insight, said that while today's minutes flagged up MPC fears over the eurozone and inflation, there was little chance of an imminent policy change.



He said: "The December MPC minutes comes across as modestly more hawkish but they do not fundamentally change the impression that monetary policy is likely to remain unchanged for some time to come.



"The MPC continue to see both the growth and inflation outlooks as highly uncertain, and it is likely that they will be reluctant to adjust monetary policy until they get a clear idea as to how the economy is reacting to fiscal policy being increasingly tightened from the start of 2011."



He forecasts rates to remain on hold until a quarter-point rise in the fourth quarter of 2011, while above-target inflation will prevent the Bank adding to its QE programme.

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