Rates to stay on hold but tensions rise
TENSIONS are growing within the Bank of England’s Monetary Policy Committee (MPC) but they are not yet sufficient to cause a hike in interest rates from the current level of 0.5 per cent, economists say.
The minutes of the June meeting showed that Andrew Sentance voted for a 0.25 per cent rise while the other seven opted to keep policy unchanged.
Stubbornly high inflation has created a real headache for monetary policymakers who are trying to keep price expectations anchored without derailing a fragile recovery. The MPC meets again this week.
“The turnaround from harmony to discord on the MPC has been rapid,” said Barclays Capital’s Simon Hughes. He pointed out that the minutes of the May meeting contained no material hint of dissent but that there is now a substantial amount of disagreement across the MPC about the inflation outlook and the appropriate setting for monetary policy.
Hayes added: “The more material disagreement is over the ability of the economy to withstand monetary tightening. From a credibility perspective, we believe that if inflation stays close to three per cent for the best part of two years, it becomes very hard for the MPC to justify inaction.”
The question is whether the potential loss of credibility from keeping policy on hold is a risk worth taking given the recovery’s fragility.
Most economists believe that rates should be kept on hold for now despite the persistent overshoot.
Citi’s Michael Saunders said: “With intensive fiscal drag, external tremors and worries over credit availability, the economy probably needs continued stimulus.”
Capital Economics’ Vicky Redwood agrees: “In fact, given the fiscal squeeze now underway, the MPC may yet have to give the economy more support.”