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King explains his MPC vote

Bank of England governor Mervyn King has confirmed his goal of getting inflation back in line after it was revealed he cast the deciding vote to raise interest rates.

The minutes from the Monetary Policy Committee meetings on January 10 and 11 showed that the resulting base rate rise was a close thing, with members voting 5-4 for an increase.

As governor of the BoE and chairman of the MPC, King is always the last to vote and therefore, in instances where members’ votes are neck and neck, has the final say.

MPC members John Gieve, Kate Barker, Tim Besley and Andrew Sentence voted in favour of a rate rise, while Rachel Lomax, Charlie Bean, David Blanchflower and Paul Tucker voted against.

While the majority agreed that there was sufficient evidence to justify an increase in base rate and no compelling reason to delay, the remaining four felt there was insufficient reason to warrant an immediate increase in interest rates.

Last week King expanded on his reasoning in voting for a January rate rise in a speech to the Birmingham Chamber of Commerce.

The former professor of economics at the London School of Economics reminded listeners that inflation is now at 3% – 1% above target and 0.1% below the point at which King will be forced to write a letter of explanation to chancellor Gordon Brown.

However, he adds that some of the factors that caused inflation to rocket in 2006 such as rising oil prices are likely to “unwind” during 2007 and the MPC’s view is that inflation will fail back in the second half of the year, possibly quite sharply.

He says: “The base rate was raised so that inflation would come back to its 2% target and future actions will depend on how risks to the inflation outlook materialise.”

Andrew Gall, business economist at the Building Societies Association, says: “Because the timing of the rise was a surprise, the fact that the vote was so close is less of a surprise. King’s Birmingham speech reveals his view on inflation is basically, why wait when you can act now.”

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