Bets were rising yesterday that the Bank of England meeting to determine the direction of interest rates was one of the most fraught on record.
In the end the Monetary Policy Committee (MPC) decided to leave rates on hold at five per cent, but with members Danny Blanchflower and Charlie Bean going head to head days before it was likely to have been volatile.
Arch dove Blanchflower argued for urgent and sizeable rate cuts, warning without them the UK would fall into a deep recession, swelling the unemployed to 2m by Christmas and leading to a 30 per cent slump in house prices.
But staunch hawk Tim Besley, who voted for a quarter point rise in July, said inflation-busting pay deals would stoke inflation and force the Bank of England to keep interest rates higher, for longer. His warning was that the UK faced a return to 1970s style stagflation if the Bank of England did not hold a firm line.
“We assume that there was a three way split again with David Blanchflower pushing for a rate cut due to the recession risk and Tim Besley voting for a rate hike due to his inflation concerns,” said James Knightley, economist at Dutch bank ING.
Nevertheless, the minutes of the MPC meeting should make interesting reading when they are released in two weeks time to see if the committee has shifted further towards cutting interest rates.
Some economists believe a rate cut could come as early as November as inflation may have peaked by then, particularly if oil prices continue to fall. Crude oil prices hit a five-month low below $106 a barrel this week, having fallen more than $40 from July’s all-time peak.
However, more hawkish members of the MPC may still be concerned that the high inflation will feed into high wage demands, and may want to wait for the January pay round.
Money markets are pricing in a good chance of three quarter-per cent point cuts by this time next year.
“We continue to see rates being cut – but not until next year when the inflation peak should have passed,” says George Buckley, chief UK economist at Deutsche Bank.