MPC Split Over Fresh Rate Rises

The rate-setting Monetary Policy Committee (MPC) of the Bank of England voted 9-0 this month to keep rates on hold at 5 per cent but remained split on the course of the economy.

The unanimous vote was expected at the meeting on December 6 and 7, after rate increases in September and November.

 However, that the policymakers appeared to be split on upside and downside risks to the economy did little to settle the debate on whether they would increase rates in the first quarter of next year.

Howard Archer, the chief UK economist at Global Insight, said that, given the continuing deep division within the MPC, "the level of wage settlements in the 2007 pay rounds will be an absolutely key factor in determining whether or not interest rates rise further in the early months of 2007".

The MPC minutes read: "Some members placed more weight on the news about upside risks from: money growth, investment, housing market developments and inflation expectations.

"Other members placed more weight on the potential downside risks from: the growth outlook in the United States as the housing market there slowed, the slack in the labour market and slower-than-average UK household consumption growth."

Overall, the Committee agreed that "it was too soon to judge the effect of recent rises in interest rates".

The recent fall in the value of the dollar was highlighted as the main news in financial markets since the meeting last month.

However, the minutes appeared to take the greenbacks weakness in stride, arguing that the fall "was perhaps best understood in a longer-term context" and noting that sterling had depreciated slightly against the euro on the month.

The threat of another rise in interest rates in the new year escalated this month when inflation shot to its highest level for a decade in official figures that were much worse than expected.

Consumer price index inflation leapt to an annual rate of 2.7 per cent for last month, from 2.4 per cent in October, lifting it to its highest since the measure was introduced in January 1997 and leaving it above the Bank’s 2 per cent target for the seventh month in a row.

Anxieties on the MPC that such strong price pressures will stoke excessive pay demands will be intensified by a matching jump in inflation on the retail price index (RPI), more commonly used as the main starting point in wage negotiations.

On the RPI, annual inflation hit 3.9 per cent last month, up from 3.7 per cent in October to its highest rate since May 1998.

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