Shadow MPC votes to keep policy on hold

UNCERTAINTY ahead of the emergency Budget and ongoing stagnation in the Eurozone, the UK’s largest trading partner, justifies monetary policy staying on hold this month, according to a majority of City A.M.’s Shadow Monetary Policy Committee (MPC).

Coming ahead of the Bank of England decision, scheduled for midday today, seven out of the nine committee members voted to keep interest rates at 0.5 per cent and quantitative easing at £200bn.

But Henderson’s Simon Ward and City A.M.’s Allister Heath both proved more hawkish, calling for a rise in interest rates. In Ward’s view, the Bank of England needs to raise the cost of borrowing by 0.25 per cent if it is serious about meeting the inflation target of two per cent.

Those who voted for no change pointed to the need for loose monetary policy to cushion the economy from the severe fiscal tightening. They also expect that the slack in the economy would bring inflation rates down from their current highs.

Only the Institute of Directors’ Graeme Leach explicitly said he would lean towards more QE after the Budget on 22 June.

The Bank of England is not expected to make any change to monetary policy this month. It has not budged on interest rates since March 2009.

But the stubbornly high rate of inflation is creating a headache for the MPC. It is now aware that the Retail Prices Index (RPI) shot up to 5.3 per cent in April, a 19-year high, while the CPI rose to 3.7 per cent.

With a Barclays survey showing that inflation expectations rose sharply in the second quarter, some members of the MPC, who have already expressed concerns about inflation, may become more vocal in their views.

We will get a breakdown of the vote in the meeting minutes, which will be released on 23 June.