Outlook: Why not get it over with; raise interest rates

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The Independent Online
ALL creatures with feathers are equal, but some are more - equal than others. Eddie George's casting vote on behalf of the Bank of England's doves meant the hawks lost the argument in February, and presumably in March as well, even though Mervyn King, the highly respected deputy governor, flew over to the other side.

To close followers of Mr King's work during his years as the Bank's chief economist, and now deputy governor designate, the surprise was that he had ever found himself on the dovish side of the argument in the first place. He was the architect of inflation targeting and has as good a claim as any individual to the success of inflation policy over the past five years. If his economics team at the Bank - which has been erring on the optimistic side in its forecasts - predicted inflation rising above target within two years, he could always be expected to favour higher interest rates.

Mr King, and a majority of the professional economists on the committee, see the inflation target as their overriding priority. The bankers - joined by DeAnne Julius, an economist from business - are giving more weight to other factors, like the pain being suffered by industry as the manufacturing sector grinds to a halt.

This is a judgement on which commentators are just as divided as the MPC, and it is a genuinely difficult call because the economy is so self evidently past its peak. Undoubtedly the economy is cooling. The question is how fast it is slowing, which is much more difficult to answer than whether it is slowing.

It is an open secret around Whitehall that one outsider, the Chancellor of the Exchequer, wishes the Bank would raise rates one more time and get it over with, rather than prolonging the uncertainty. A quarter point increase would do little direct harm to businesses or homebuyers and might do a lot of indirect good if it succeeded in persuading the financial markets that UK rates would climb no further.

As things stand, the MPC's flock of dithering doves is making it harder for the Chancellor to justify his claim that the days of boom and bust are decisively over. Our gentle feathered friends in Threadneedle Street would still rather take long-term risks with inflation than risk short- term unpopularity with manufacturers.

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