MPC was split four ways over interest rate rise

THE MONETARY Policy Committee was split four ways over interest rates, according to minutes of its meeting two weeks ago at which it ordered a 0.25 per cent hike. The minutes showed the MPC voted eight-to-one to tighten monetary policy, with only the leading "dove", DeAnne Julius, voting for no change.

Economists had expected a seven-to-two vote and interpreted the defection of Sushil Wadhwani to the hawks and the general tone of the minutes as pointing to another rate hike, perhaps as soon as January.

The minutes revealed at least one member debated raising rates 0.5 per cent while another - probably Willem Buiter - called for a rise of less than 0.25 per cent.

"Talk up until now on the divisions within the MPC has centered on dissent from the doves," said Philip Shaw, an economist at Investec. "The minutes open up the possibility of a split in the other direction with a group pressing for more aggressive tightening of policy."

The hawkish feeling was underlined by a discussion of the factors supporting higher rates - the tight labour market, the pace of domestic demand and the recovery of the global economy. Some members - perhaps deputy governor Mervyn King and two others - said the choice was between 0.25 and 0.5 per cent. They backed away from the higher rise because of the impact on sterling.

One member said a rise of less than 0.25 per cent would send out the right message while recognising the low level of inflation. This was rejected because of a "significant risk" it would be misinterpreted. Ms Julius argued inflation was low and set to remain so, depressed by the strong pound and intense competition within the economy.

The MPC disagreed over the impact of the rise in money market rates, which has pushed up the cost of borrowing for both business and homebuyers. One member said the markets were "doing some of the committee's work for it" but others argued the MPC would "take material risks with its credibility" if it backed away from a rate hike. "The markets' view of the MPC's reaction function would change, storing up trouble for the future," the minutes said.

Labour market data yesterday showed unemployment fell to a fresh 19-year low. The number out of work and claiming benefit fell 8,400 in October, more than the forecast 5,000, to 1.204 million or the lowest since March 1980. Earnings growth fell to 4.7 per cent from 4.9, in line with forecasts but above the Bank's 4.5 per cent "comfort zone".