Three-way MPC split on interest-rate vote

Published on Wednesday 23 July 2008 21:13

DAVID Blanchflower, the only Bank of England policymaker who voted for a cut in interest rates this month, is likely to become an increasingly isolated voice as inflation gathers pace before the year is out.

Minutes from July's meeting, published yesterday, show that arch-dove Blanchflower argued that a cut was needed to prevent a recession while hawk Timothy Besley wanted an immediate rate hike.

The remaining seven members of the central bank's monetary policy committee chose to hold borrowing costs at 5 per cent.

This produced the first three-way split on the direction of rates since May 2006, with the decision described as "a difficult one" for all nine policymakers.

Most analysts had been expecting an 8-1 vote in favour of a freeze in interest rates, with Blanchflower the sole rebel.

The bank faces a testing period as it juggles with a slowing economy and rising inflation.

Figures last week showed that the key consumer price index (CPI) measure of inflation had jumped to 3.8 per cent in June – almost twice the central bank's 2 per cent target. With that rate expected to spike at almost 5 per cent later this year, economists believe more policymakers could side with Besley in the months ahead.

Ben Read, senior economist at CEBR, said: "This delicate balancing act is likely to continue in the coming months, although it would be no surprise if we saw more members voting in favour of rate hikes as inflation figures will inevitably worsen in the short term."

The minutes revealed that members discussed whether raising interest rates could send "a strong signal" that the bank was focusing on inflation and remained determined to bring it back to target in the medium term.

But there were also a series of arguments for keeping rates on hold as fresh evidence pointed to sharp slowdowns in the manufacturing and service sectors.

The minutes said: "A rate change this month would be a surprise at a time when credit and other financial markets remained fragile, and any change in rates would be better communicated alongside the bank's August inflation report."

Economists expect interest rates to remain at 5 per cent until the end of the year, although a cut isn't being ruled out by some.

Howard Archer, chief UK economist at Global Insight, said: "The three-way split ... encapsulates the predicament that the Bank of England is in over a deepening economic slowdown yet elevated and rising inflation.

"Given that inflation seems set to near 5 per cent later this year and is likely to still be above 4 per cent at the end of 2008, the bank will probably be reluctant to cut interest rates before 2009 unless the economy really falls off a cliff over the coming weeks."