MPC minutes reveal three-way split over base rate decision

25 April 2008 / by Rachael Stiles
The minutes from the Monetary Policy Committee, released yesterday, reveal a three-way split in the decision to cut the Bank of England base rate this month.

Despite current lending conditions and fears that the UK could be sliding into a recession, two members of the committee – Andrew Sentence and Timothy Besley – said that the Bank of England base rate should be left at 5.25 per cent.

The typically dovish David Blanchflower argued that the rate should be cut by half a percentage point, arguing that "In the light of the outlook for demand and hence inflation in the medium term, it was appropriate to look through the near-term increase in inflation, which was likely to be short-lived."

The remaining six members – including the Bank of England Governor Mervyn King – voted for the quarter point cut which brought the rate down to five per cent, completing the first three-way split in the committee for two years.

Economists have been taken aback by the divide in opinion, because they largely expected all of the members to be in favour of cutting the base rate.

The split has also dampened hopes of a further rate cut, which was thought to come as early as May. However, all members of the committee agreed that rate cuts would probably need to fall further in the near future.

The minutes explained the committee's ultimate decision to cut the rate: "A 25 basis point reduction now would be consistent with market expectations of a gradual easing of Bank Rate."

Additionally, it said that "In order to avoid an excessive increase in the margin of spare capacity and hence undershooting the inflation target in the medium term, it was necessary to offset, partly but not wholly, the current and prospective downward shift in demand arising from the deterioration in global credit conditions and its consequences."

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