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Finance

Inflation concerns drove rate freeze

21/05/2008

Only one member of the Bank of England's monetary policy committee (MPC) voted for interest rate cut last month, with the majority voicing concerns over inflation.

The meeting saw eight committee members vote to hold the interest rate at five per cent, while David Blanchflower voted to cut the rate by a quarter of a percentage point.

After last month's three-way split from the MPC, a coming together was expected to focus on tackling inflation - as was David Blanchflower's push to cut rates.

Mr Blanchflower claimed in the meeting factors pushing up inflation were beyond the control of the MPC and the current period of above-target inflation would have "little tendency to persist", so an interest rate cut was necessary to aid the economy.

However, the majority – according to the minutes of the meeting released today – found: "Although economic activity was likely to slow, the committee had judged that some slowing in the growth rate of output was likely to be necessary for inflation to settle close to the target around two years ahead.

"A further reduction in Bank rate this month could create the impression that the committee was trying to stabilise output growth rather than maintaining its focus on the inflation target."

The MPC discussed whether the slowdown due to rising prices and the credit crunch would pull down inflation – or whether the economy was strong enough to survive the current storm.

The weakening property market was also seen as a threat to the economy.

As in the predictions in the May Inflation Report, the MPC admitted inflation would stay high in the coming months, and attempts to bring it down swiftly would hit the economy.

However, inflation is expected to fall to two per cent by 2011.

Predictions for economy see GDP growth "slowing markedly… reflecting subdued real income growth, tighter credit supply and weaker world activity".

"The minutes of the May MPC meeting largely reinforce the view that the Bank of England is 'wait in see' mode for an extended period as it monitors growth and inflation developments," said Howard Archer at analysts Global Insight.

"With inflation likely to approach four per cent this summer, the Bank of England will tread extremely carefully on the interest rate path.

"Nevertheless, we believe the Bank of England could yet trim interest rates from 5.00 per cent to 4.75 per cent in the final months of this year in reaction to very weak economic activity, elevated concerns about the housing market and ongoing tight credit conditions."

He added: "Further out, we expect interest rates to fall to 4.5 per cent by the end of 2008 or early in 2009, and it is still very possible that they will ultimately fall further in 2009 as an extended period of very weak economic activity increasingly dilutes underlying price pressures and leads inflation to retreat significantly."