MPC split but rates stay low

Julian Harris
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DESPITE tensions among its members, Britain’s interest rate setting body is expected to keep rates at 0.5 per cent when it meets on Wednesday and Thursday.

In November seven members of the Monetary Policy Committee (MPC) voted to leave policy unchanged.

Yet divisions between two opposing members of the committee have deepened and Bank of England governor Mervyn King has faced criticism from fellow MPC voters.

American member Adam Posen told MPs that “a number of people on the committee” thought the support for the coalition government’s cuts last spring was “excessively political.”

Posen has also argued for a further period of quantitative easing (QE2) in the UK, creating a three way split in the MPC.

Andrew Sentance, whose term on the committee expires in May, is expected to again vote for an increase in rates by 0.25 per cent.

Sentance has recently repeated his view that the MPC needs to tackle inflation. Consumer price inflation (CPI) rose to 3.2 per cent in October, considerably above the Bank of England’s two per cent target.

Yet he is unlikely to be joined by any of his colleagues on the MPC this week, according to Simon Ward of Henderson Global Investors. “When a policy change comes, it will be a mass movement rather than individuals splitting off into factions,” said Ward.

Governor King has insisted that medium term inflation is under control. And the Bank’s chief economist Spencer Dale said that while the MPC “remains as hard nosed as ever” on inflation, the “current focus is on providing the stimulus necessary to support the recovery.”