Outlook: Blunkett gives the Bank new target

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DAVID BLUNKETT'S stirring pledge to return Britain to full employment should cause the feathers to fly among the hawks and doves on the Monetary Policy Committee.

If, as yesterday's inflation report suggests, the MPC has moved into the unchartered territory of a three-way split, the Secretary of State for Education and Employment's remarks will make its deliberations even more interesting.

Some of the nine members are clearly inclined to start thinking about the next increase in interest rates, having already flagged June's cut as a mistake.

The new forecast shows inflation falling more in the next few months than previously expected, but then picking up more sharply to climb towards 3 per cent in 2001.

This explains why some participants in the financial markets saw the report as hawkish.

How, then, does this classic central bank caution sit with Mr Blunkett's clarion call?

New Labour was itself ultra-cautious in the election manifesto, avoiding any use of the loaded phrase "full employment", precisely to avoid any conflict with the goal of low and stable inflation.

Gordon Brown insisted it was low inflation that would deliver the conditions for reductions in joblessness and, in the approved phrase, "high and stable levels of employment". Perhaps Mr Blunkett was simply taking advantage of the fact the Chancellor is on holiday to convert that into the older Labour goal of full employment or perhaps, instead, he believes that the economy has already reached those sunlit uplands.

If it is the latter, he would appear to have been joined by some members of the MPC. For an unknown number disagreed with yesterday's published central forecast, instead predicting a U-shaped path for inflation staying below 2 per cent at all times. That points to a good case for a further reduction in the cost of borrowing without any danger to the inflation target. Yet we also know that there was unanimity for no change in rates in July.

No wonder some commentators yesterday wondered how many MPC members - if any - actually agreed with the published inflation forecast. Speculation about the committee's exact formation of play in this month's meeting abounded in the City - was it 3-3-3 or 1-6-2? Given the fragmentation of views, the minutes of the committee's August meeting, due next week, will make even more compulsive reading than usual.

Mervyn King, the deputy governor, noted that the committee's differences of opinion reflect genuine uncertainty about the economy, including the jobs market. The key question is how much lower unemployment can fall before it triggers wage pressures. Lower than in the past, certainly, thanks to both the Thatcher reforms and the New Labour New Deal.

But as low as 2 or 3 per cent from the current 6 per cent? That might turn out to be Mr Blunkett's midsummer madness, and one unlikely to be shared by even the most dovish member of the MPC.