Wednesday, July 18, 2007
6-3 - but three different views
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The Bank of England's monetary policy committee voted 6-3 to hike Bank rate from 5.5% to 5.75% on July 5, its minutes revealed. Although this was in line with market expectations, the detail suggested three distinct views on the committee and the overall impression was of more caution on further rate hikes than might have been expected.

The two switchers from June were Paul Tucker, as expected, and Kate Barker. Charlie Bean, the Bank's chief economist, and Rachel Lomax, deputy governor responsible for monetary policy, voted against. Here are the three views:

"For some members, a change in Bank Rate was not warranted this month, although there were differing views about the likelihood of Bank Rate needing to be increased further at some juncture. The labour market data had continued to surprise on the downside, with weak employment growth and subdued earnings growth. And indicators of capacity utilisation, although somewhat above normal, were not unusually elevated.

"For a majority of members there was a strong case for an immediate rise in Bank Rate of 25 basis points ... For some of these members there were downside risks which suggested caution, but these had not intensified over the month. The May Inflation Report had been consistent with a further rise in Bank Rate in 2007, with the balance of risks having been judged to be to the upside. Against that background, for these members, the news since the May Report had now been sufficient to shift the balance in favour of a move this month, without a clear presumption that further increases would be necessary.

For other members, the data suggested that the overall balance of risks was more firmly to the upside and any delay in raising Bank Rate this month would run the risk that rates would eventually have to go higher than otherwise would have been necessary, although no immediate judgement was being made about the future path of rates."

The full minutes are available here.

Comments

David,

Have these inflation figures and also today's GDP growth figure (0.8% for Q2) changed your view on the interest rate outlook? On 9th July you wrote "the markets take a more aggressive view on UK rates than I do, discounting something like 6.25%".

Posted by: Ed at July 20, 2007 03:07 PM

David,
retrospectively, should the MPC have raised the IR by 0.5% steps twice in 4Q 2006, instead of this "death by thousand cuts"?
What is the advantage of acting so slowly if "the risk is on the upside"? If we believe what they say, that means they are risking to have to raise the IRs more overall to achieve an effective control of the inflation.
What do you think?
regards

Posted by: Michele at July 20, 2007 04:32 PM

I'll respond to these and some other outstanding questions on Sunday.

Posted by: David Smith at July 20, 2007 04:42 PM