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A split emerged at the top of the Bank of England today over how to tackle inflation and the fragile economic recovery.
The nine-strong monetary policy committee voted unanimously to hold interest rates at 0.5% and maintain quantitative easing at £200 billion early this month.
But minutes from the meeting, published today, showed some members argued that inflation risks have increased — suggesting they are opposed to any further action from the Bank to sustain the recovery.
“Members drew different inferences about how the balance of risks to inflation was evolving,” the minutes said. “Some members considered that the upside risks to inflation had increased slightly over the month. Others felt that the balance of risks had not changed materially.”
Bank chief economist Spencer Dale and the hawkish Andrew Sentance are thought to be among those concerned about inflation which is well above the 2% target at 3.5%. Bank Governor Meryvn King is seen to be in the opposite camp.
The pound rose 1.04 cents against the dollar to $1.5346 and 0.60 cents against the euro to €1.1132.
It was driven by speculation that the Bank will not pump any more money into the economy through its quantitative easing programme. Sterling was also buoyed by an unexpected fall in unemployment.
Philip Shaw of Investec said that while the more hawkish members of the MPC were concerned about inflation, there was no sign that interest rates will rise any time soon.
“The question is whether or not the Bank will provide more quantitative easing or leave it on hold,” he said. “The minutes and the debate about inflation this month suggests it is on hold.”
David Buik of BGC Partners said the MPC could print more money later this year if the nascent recovery in the economy falters.
“The committee remains cautious and has selected the wait and see gear,” he said. “However, one cannot rule out the possibility of an extra £25 billion being slipped into the economy in a few months' time.”
The minutes showed some members of the MPC were concerned the weak pound would keep inflation above target for longer by driving up the price of imports.
Others warned that the “substantial and sustained” slack in the economy caused by the recession — including high unemployment, low wage growth, and lack of demand for British goods at home and abroad — could drag inflation below target.
“It was clear output was and was likely to remain well below capacity for an extended period,” the minutes said.
The Bank said several factors would constrain growth, including the lack of bank lending, tax rises and spending cuts, and problems in key trading areas such as the eurozone.
