BoE dilemma highlights difficulty of turning points
The minutes of the Bank of England’s most recent Monetary Policy Committee (MPC) meeting demonstrate that Britain’s monetary policy makers are all over the shop. Most committee members voted to keep rates at 5%, but there was also a vote to raise rates as well as one to lower rates. This three-way split highlights how difficult it is to understand where inflation is actually headed in the wake of a housing bust and commodity boom.
Bank of England policymakers were split three ways for the second meeting in a row at their interest rate-setting meeting earlier this month.
Minutes of the meeting showed seven members of the Bank’s nine-strong rate- setting body voted to hold rates at 5%.
However, Timothy Besley voted to increase rates to 5.25%, while David Blanchflower voted for a cut to 4.75%.
The minutes showed most wanted to hold rates because although inflation was rising, growth prospects had worsened.
In recent months, the Bank of England’s Monetary Policy Committee (MPC) has faced tough choices over the level of UK interest rates, with the economy experiencing both accelerating inflation and slowing growth.
Latest figures showed CPI inflation hit 4.4% in July, more than double the 2% target rate. However, the UK economy grew by just 0.2% in the second quarter of the year.
There was more worrying news for the Bank on Tuesday as a survey suggested that Britons’ inflation expectations were running at their highest level for 16 years.
The latest Barclays Survey of Inflation Expectations found inflation was expected to be at 4.8% in two years’ time, the highest reading since comparable records began in 1992.
-BBC News, 20 Aug 2008
Monetary cuts or hikes work with a considerable lag. So, what the MPC does today won’t actually show up in real economy effects until 2009. Given the slowdown in the economy and the credit crunch, getting things wrong by over-tightening could be disastrous. Nevertheless, inflation expectations in the UK are worryingly high and that has to bother policymakers.
As data pointing to recession continue to come out, my bet on the MPC’s next move is on a rate cut.