MPC split persists over interest rate rise
THE Monetary Policy Committee remained split six to three in favour of keeping interest rates on hold at their May meeting.
Minutes of the latest meeting show that while the majority were concerned at rising inflation the majority were more concerned about the underlying strength of the economy.
Andrew Sentance, who is leaving the committee, was its most hawkish member advocating a 0.5% rise while Spencer Dale and Martin Weale called for a 0.25% hike.
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Senior stockbroker David Scott said: “The vote of six to three in favour of keeping rates on hold, at a record low of 0.5%, as revealed in this month’s minutes from the Monetary Policy Committee’s May meeting came as no real surprise following on from Tuesdays shocking inflation numbers and last week’s quarterly inflation report.
“It was also the fourth month in a row that three members have voted for a rise. Going forward the most interesting dynamic is that this was the last meeting for Andrew Sentance, who again voted for a half a point increase.
“Next month he will be replaced by former Goldman Sachs economist Ben Broadbent, who at the start of the week said that an increase in UK rates would not necessarily derail the economy.
“A rate rise is coming and the only question at the moment is whether or not it will be at the end of this year or at the start of next. This decision is likely to be decided by events beyond our shores.”
The latest inflation report from the Bank of England forecast CPI infation hitting 5% before falling away in 2012 and 2013 and downgraded growth forecasts for 2011 from 2% to 1.75%.
David Kern, chief economist at the British Chambers of Commerce, said: “Following the CPI figures showing an increase in inflation to 4.5%, the pressures facing the MPC have intensified. The tough austerity measures that are being implemented will inevitably reduce demand in the economy over the coming months. Disposable incomes will be squeezed, and businesses and individuals will feel the pinch. In these circumstances, a premature increase in interest rates would threaten to derail the recovery.
“While we accept that interest rates will have to increase towards the end of the year, there is no evidence that wage pressures are strengthening. Against this background, the MPC must hold its nerve and postpone interest rate increases until the recovery is more secure.”
