Lone voice of dissent as MPC votes to hold 0.5% rate

Published on Wednesday 23 June 2010 19:29

FEARS over inflation caused a rift between Bank of England interest rate setters for the first time in more than a year, minutes of the monetary policy committee's latest meeting yesterday revealed.

Although the committee voted 7-1 in favour of maintaining rates at their historic low of 0.5 per cent earlier this month, it was the first time since the economic crisis that any member had made the case for a tightening of monetary policy.

Andrew Sentance pushed for a 0.25 percentage point rise to 0.75 per cent amid concerns over the resilience of inflation in the aftermath of the recession.

Inflation eased to 3.4 per cent in May after hitting a 17-month high of 3.7 per cent in April. However, it still remains above the bank's 2 per cent target.

Minutes of the MPC's June meeting showed that while the majority of members did not think inflation risks posed a big enough threat to alter the cost of borrowing, there was a lack of consensus over whether inflation would fall above or below the bank's target in the medium term.

Jonathan Loynes, of Capital Economics, said it was a "testing time" for the MPC given the ongoing economic uncertainties. "For now, most members appear to be holding their nerve," he added.

Howard Archer, chief UK and European economist at IHS Global Insight, said it was little surprise that Sentance was the first to push for a rate increase given his previously hawkish stance. But he added: "The minutes do seem modestly more hawkish overall, in particular revealing concern within the MPC over the recent resilience of inflation in the UK and the rise in household's short-term inflation expectations."

Even so, Archer believes the bank will maintain rates at 0.5 per cent for the duration of this year in order to mitigate some of the pain that will be felt as a result of cutbacks announced in yesterday's emergency Budget.