MPC poised to hold rates at 0.5 per cent

 
Julian Harris
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INTEREST rates are expected to stay at 0.5 per cent today, after the Bank of England’s rate setting committee meet for the final time this year.

A split has emerged in the Monetary Policy Committee (MPC) in recent months, with “hawk” Andrew Sentance pushing the case for a rate rise and “dove” Adam Posen arguing for a further bout of quantitative easing (QE2).

But seven of the nine voting members remain on the fence, opting against a move in either direction.

“The difficulty is the unprecedented nature of the situation since the credit crunch,” said Peter Spencer of the Ernst and Young ITEM Club.

After a normal recession inflation should have dropped, he said.

Bank governor Mervyn King has been forced to write several letters to chancellor George Osborne to explain why inflation remains well above the two per cent target.

King has argued that the MPC is concerned about medium term inflation, not short term effects.

The committee is “ready to adjust policy in either direction,” he said.

Since the MPC’s November announcement, the Office for Budget Responsibility (OBR) released its economic and fiscal outlook.

The OBR slightly lowered the projected growth rate for the next two years, but remains optimistic about GDP increasing by over two per cent per annum.

And employment will increase, according to the OBR. “Private sector job creation more than offsets falling public sector employment – just as it did during the 1990s,” the report stated.

The MPC’s statement today will be followed next week by the Bank’s quarterly bulletin-

CITY A.M. | SHADOW MPC

ALLISTER HEATH | CITY A.M
“The economy is continuing to grow, led by manufacturing in particular. There is much less spare capacity than people realise, one reason why inflation is too high for comfort. We need a small hike in rates now to send a strong message to the markets.”

SIMON WARD | HENDERSON
“Raise by 0.5 per cent. Policy is much too loose, as evidenced by nominal domestic demand growth of 7.1 per cent in the year to the third quarter, the highest since 1998. Consumer inflation expectations have surged, threatening stronger wage pressures in 2011.”

GEORGE BUCKLEY | DEUTSCHE BANK
“The economic news has been consistent with keeping policy on hold for the time being, ruling out rate increases or further QE. If the recovery continues the Bank could begin raising rates from mid 2011, however.”

PHILIP SHAW | INVESTEC
“Domestic economic news has been relatively encouraging over the past month, while inflation news has been disappointing. Further QE seems unjustified, at least at this stage, and rates should stay at 0.5 per cent.”

VICKY REDWOOD | CAPITAL ECONOMICS
“Given the tricky combination of a renewed rise in inflation and the looming fiscal squeeze, I’d leave policy unchanged – but with a bias towards more QE if the recovery disappoints in the following quarter.”

TREVOR WILLIAMS | LLOYDS BANKING GROUP
“UK growth has been healthy recently but with fiscal tightening and the VAT rise to come, plus the backdrop of weakening growth in Europe, the prospects for a sustained recovery are not yet secure enough to warrant a tightening of policy.”

HOWARD ARCHER | IHS GLOBAL INSIGHT
“No change. The economy is ending 2010 reasonably well and there currently seems little need for more QE. But I would not raise interest rates given the threats to growth coming from the fiscal squeeze and events in the Eurozone.”

JAMIE DANNHAUSER | LOMBARD STREET RESEARCH
“Output growth through the fourth quarter of the year appears to be robust, especially in manufacturing. If anything, inflation could surprise on the upside in the near-term. Leave monetary stance unchanged.”

GRAEME LEACH | IOD
“We don’t want or expect any pre Christmas surprise. Rates and QE need to remain on hold but we view the anaemic level of broad money growth with concern. Growth prospects will weaken in the first half of 2011, and more QE is very possible.”