Two MPC members vote for rate rise in January
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Two members of the Bank of England’s Monetary Policy Committee voted for an interest rate rise in January’s MPC meeting.
Minutes from the meeting reveal Andrew Sentance and Martin Weale both voted to increase Bank Rate by 25 basis points.
Adam Posen preferred to maintain Bank Rate at 0.5% but increase the size of the asset purchase programme by £50bn to a total of £250bn.
The Bank’s MPC has kept rates at 0.5% since March 2009.
The minutes from the meeting say: “For two members, the evidence suggested that the balance of risks was already sufficiently clear to warrant an immediate increase in Bank Rate.
“The continued elevated rate of inflation, which was forecast to persist, posed a significant risk to inflation expectations and hence to the medium-term outlook for inflation.
“This made more powerful the case which had been building for some time for a gradual rise in Bank Rate.”
For one member - Posen, the balance of risks to inflation continued to warrant an expansion of the Committee’s programme of asset purchases, financed by the issuance of central bank reserves, because it was likely that inflation would fall to below the target in the medium term.
The minutes say: “This member acknowledged that a sustained upward trend in commodity prices or in global demand prospects, or a shift in sentiment against sterling, could outweigh the domestic forces pushing down on inflation. But this member did not see this risk as yet large enough to require a policy tightening.”
Vicky Redwood, senior UK economist at Capital Economics, says: “January’s MPC minutes suggest that the Committee was edging closer towards a near-term rate hike.
“However, yesterday’s GDP figures could well dissuade the waverers from rushing into a premature policy tightening.
“What’s more, some members are still convinced that policy should not be tightened.
“For now, then, we still expect rates to stay on hold this year – and even if we do see a rate hike, it might have to be quickly reversed if the economy is as weak as we expect.”
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Readers' comments (3)
Ancient Wisdom...is a mortgage broker in N3 | 26 Jan 2011 10:21 am
Can Mortgage Strategy set up a competition for entrants to predict BBR at end of 2011, 2012 and 2013?
oops, Mayan Calender says world ends in Dec 2012 - RDR funnily falls then too??)
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Anonymous | 26 Jan 2011 2:58 pm
I still dont understand how a Rate Rise can actually help curb inflation?
Surely, the problem is price driven rather than demand driven (thinking back 30 years to my economics lessons!)
Increasing Rates wont help importers prices being increased for instance.
Am I being too basic here (ie being daft!)?
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Anonymous | 26 Jan 2011 3:34 pm
Inflation typically occurs when there is a lack of capacity in the economy, or in basic terms, too much money chasing too few 'items'
Interest rate rises are desigend to curb inflation by both encouraging savers and taking 'cash' out of the economy through dicouraging borrowing by making it more expensive and taking 'money' out of the pockets of consumers who have debt (i.e. most of us)
The issue is that the current bout of inflation is largely 'imported' and is from three main factors:-
1. The depreciation in the value of the £ making exports cheaper but imports more expensive
2. The increase in world wide commodity prices from food to oil
3. the increase in VAT which has yet to fully come through
There is significnat excess in the economy, so to your point, an interest rate is going to very ineffective in tackling the route causes at present
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