MPC minutes reveal decision was geared towards inflation

22 May 2008 / by Rachael Stiles
Stemming inflation was at the top of the Monetary Policy Committee's (MPC) priority list this month, minutes from the May meeting have revealed.

After considering "developments in financial markets; the international economy; money, credit, demand and output; and costs and prices" the MPC voted eight to one to keep the base rate at five per cent.

The minutes showed that keeping the base rate at five per cent was necessary to try to dampen inflation, despite risks to growth: "Although economic activity was likely to slow, the Committee had judged that some slowing in the growth rate of output was likely to be necessary for inflation to settle close to the target around two years ahead."

The Bank of England's Inflation Report painted a grim picture for inflation, which hit three per cent in April, indicating that any rate cuts now would cause the Bank to overshoot its targets even further.

Typically dovish David Blanchflower was the only member to dispute the otherwise unanimous decision, pushing for a quarter point cut because it was more important to "look through the short-term spike in inflation." He said that "The factors pushing inflation up – oil and other commodity prices – were beyond the MPC’s control".

Despite keeping the base rate the same this month, the MPC minutes showed that it was not as adamant as last month that there might not be another cut for some time, challenging speculation that it might be another two years before another reduction. The MPC discussed the possibility of a rate cut, and did not rule out another cut in the near future.

Meanwhile, persistent rumours of a recession in the UK are circulating. Legal & General has voiced its "concern" and highlighted the potential risks, casting doubt on the Bank of England's prediction that growth could recover in 2009.

"With global inflation so high, the burden of an economic slowdown is likely to be felt most severely in countries with the weakest financial positions. A decade ago that was Asia. Today it is the US and the UK." said James Carrick, investment strategist at Legal & General Investment Management.

"While the Bank of England anticipates below-trend growth in 2008 and a recovery in 2009, our recession predictor is suggesting concern".

The minute's from America's Federal Reserve has thrown a similar cloud of uncertainty over the US economy. While the US Fed did cut its rates last month, the decision was a close one it said, and it was suggested that further cuts were unlikely unless inflation improved.

© Fair Investment Company Ltd