Another Bank of England member votes for interest rate rise
Bank minutes showed that most committee members believe inflation risks had increased in the past few months
The split on the Bank of England's rate-setting committee over whether interest rates should go up immediately has widened.
Martin Weale surprised the City by joining Andrew Sentance in voting for a quarter-point increase at this month's gathering of the Bank's nine-strong monetary policy committee. Minutes from the meeting, published this morning, showed that the pair were out-voted by the rest of the MPC who opted to keep rates on hold at 0.5%.
The meeting took place a fortnight ago, before the committee knew the extent of the slowdown in the economy between October and December. The economy shrank by 0.5%, far worse than anyone in the City had expected. Even when the snow was taken into account, the outcome would have have been "flattish".
The committee did have an early estimate of the latest inflation numbers, which showed consumer prices rising by 3.7% in December, far above the Bank's 2% target.
The minutes showed that most committee members believe inflation risks had increased in the past few months, but they also noted that inflation had been boosted by the weak pound along with increases in VAT and energy prices. These MPC members concluded that inflation would fall back to the Bank's target once the impact of these factors faded.
"Some members also noted that an increase in Bank Rate at this meeting might be misinterpreted as a signal that the committee would attempt to bring inflation back to the target excessively rapidly, which could cause expectations of a relatively sharp tightening of monetary policy that could have a detrimental impact on confidence and activity," according to the minutes of the meeting.
Meanwhile, another member of the committee, Adam Posen, once again called for the Bank's quan! titative easing programme to be increased by 50bn to 250bn to stimulate the economy.
The news came after governor Mervyn King said last night that he expected inflation to rise towards 5% in coming months, but added that this was not enough to justify an immediate increase in interest rates.
King also warned that Britain faces the worst squeeze on living standards since the 1920s - saying this was "the inevitable price to pay for the financial crisis". As wages have failed to keep pace with rising inflation, workers' take-home pay this year will be no higher than it was in 2005 - the longest period of falling living standards in 80 years.
"January's MPC minutes suggest that the committee was edging closer towards a near-term rate hike but of course yesterday's weak GDP figures have altered the picture somewhat," said Vicky Redwood, senior UK economist at Capital Economics.
"On their own, the minutes suggest that a February rate hike is a bigger danger than before. However, yesterday's GDP figures could well dissuade the waverers from rushing into a premature policy tightening. What's more, some members are still convinced that policy should not be tightened see Mervyn King's dove-ish speech last night, and Adam Posen's continued vote for more QE. For now, then, we still expect rates to stay on hold this year and even if we do see a rate hike, it might have to be quickly reversed if the economy is as weak as we expect."
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