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Investment News Bank Committee Remain Split On Interest Rates 18471576

Bank committee remain split on interest rates
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Bank committee remain split on interest rates

23 March 2011 / by Paul Dicken

Members of the Bank of England Monetary Policy Committee remain split on whether to change interest rate levels, minutes from the committee’s March meeting show.

Published ahead of Chancellor George Osborne’s second Budget on 23 March, the minutes from the Monetary Policy Committee (MPC) meeting held on 9 and 10 March showed that six members voted to keep the Bank Rate at 0.50 per cent.

Three members voted for increases. Andrew Sentance called for an increase to one per cent, while Martin Weale and Spencer Dale called for an increase to 0.75 per cent.

With the Consumer Prices Index of inflation at 4.4 per cent the Bank of England is under pressure to raise rates.

However, one member of the committee, Adam Posen, voted again to cut rates by a further 25 basis points to 0.25 per cent and boost the programme of asset purchases by the Bank known as quantitative easing to support the economy.

The Bank of England is facing a tough dilemma with UK economic growth sluggish and inflation above the two per cent target, largely due to external factors such as rising commodity prices.

The MPC minutes for the March meeting said: “Updated estimates from the ONS [Office for National Statistics] indicated that GDP had fallen by 0.6% in 2010 Q4; a marginally larger decline than previously estimated. Abstracting from the impact of the bad weather in December, the ONS estimated that output had been broadly flat.

“The key question remained whether that slowdown would prove temporary or whether it presaged a more prolonged period of weak growth.”

Inflation growth in February ‘mainly reflected rising crude oil prices’ the minutes said, and warned that inflation remaining significantly above the two per cent target could mean households and businesses expect higher inflation in the future, leading to higher prices and higher wages.

If this happens the MPC would have a harder job reducing inflation in the longer term.

On the decision to set the Bank Rate the minutes said ‘recent developments appeared to increase the degree of uncertainty over the medium-term outlook for both [economic] activity and inflation – something that had been reflected in financial market measures of uncertainty over the likely path of Bank Rate.’

On the whole, the MPC chair Bank of England Governor Mervyn King appeared to see the balance between risks to economic growth and further rising inflation was unchanged, leading to the proposal of keeping the official interest rate at 0.50 per cent.

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