A three-way split sharpens MPC tensions

A RARE three-way split has emerged among the members of the Bank of England’s Monetary Policy Committee (MPC), which earlier this month voted to hold rates at 0.5 per cent and asset purchases at £200bn.

Andrew Sentance stuck to his hawkish call of a rise in rates of 0.25 per cent while dove Adam Posen voted for a £50bn extension of quantitative easing, as expected. The remaining seven members voted to maintain the status quo, but admitted the near-term risks to inflation were higher than previously expected. Some of those voting to keep policy on hold felt that there was a growing chance of more stimulus being needed, but that “the evidence was not sufficiently compelling to imply that such a course of action was necessary at present”.

Sentance reiterated his arguments that it was appropriate to withdraw some of the exceptional monetary stimulus given the strong momentum of growth in the first half of the year and that the MPC risked losing its inflation-fighting credibility.

In contrast, Posen believes the spare capacity in the economy is sufficiently large that monetary policy could be used to stimulate growth without an undesirable increase in underlying inflationary pressures.

City economists were unsurprised by the three-way split – the sixth since the MPC gained independence in 1997 – and many suggested that the minutes pointed to more QE, perhaps as early as next month, if the Bank feels looser monetary policy will offset tighter fiscal policy.

“It could happen as early as the November MPC meeting if the third-quarter GDP data show only weak growth and other data and survey evidence point to a poor start to the fourth quarter,” said Howard Archer at IHS Global Insight, but added that he suspected most MPC members would prefer to hold fire for now.