Bank’s doves stick by low rates despite nervous split

 
Julian Harris
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STERLING dropped by over half a per cent against the dollar yesterday morning, after the Bank of England revealed that two thirds of its monetary policy committee members still oppose a rise in rates.

However, there were further signs that the committee may be moving towards a gradual normalisation of interest rates.

Six members of the nine-man committee voted against any rise in rates, yet the minutes, released yesterday, admitted to “differences of view between these members” on upside risks to inflation.

Some of the six felt that “the case for an increase in Bank rate had strengthened in recent months.”

The Bank rate has sat at the historic low of 0.5 per cent for over two years.

There is a “significant risk” of consumer price inflation shooting above five per cent in the “near term”, the minutes revealed.

“We agree,” commented Alan Clarke of BNP Paribas, “we see the peak at 5.2 per cent.”

“What is clear is the Bank will have to revise up its inflation projection at the May inflation report,” Clarke added.

Inflation in the first three months of this year could already exceed the level that the Bank predicted in its February inflation report.

The effect of January’s VAT rise on prices was “as yet unclear,” the committee believed.

Yesterday the Bank also revealed results from its latest agents’ survey, which contains more evidence on inflationary pressures, according to Citigroup’s chief economist Michael Saunders.

“The agents report that labour cost growth is back to about the 1998-2007 norm,” he said. “With the weak pound and strong import prices, this would set the stage for a lasting inflation overshoot -- we still expect the committee to hike soon.”

Andrew Sentance voted again for a 0.5 per cent tightening of rates, and stood out among the committee notes for his ultra-hawkish comments. Bank chief economist Spencer Dale, along with Martin Weale, both again voted for a milder 0.25 per cent rise in Bank rate.

However, the Bank’s chief dove, American Adam Posen (pictured), continued to argue for even more quantitative easing.