Another hard interest rate decision for Bank

20 August 2008

MPC again voted three ways on how to deal with interest rates in August

The Monetary Policy Committee (MPC) was again divided when it came to deciding how to treat interest rates for the next month, with seven out of nine members voting to leave rates unchanged at 5.0%, one member voting for a 0.25% increase and one voting for a 0.25% decrease.

The split highlights that the MPC are still battling with their current challenge of trying to balance the economic slowdown with increasing inflation.

According to the minutes, most of the committee wanted to keep rates at 5.0% because although inflation was on the increase, growth prospects had worsened.

The latest reports showed that CPI inflation reached 4.4% in July, over double the target of 2%. However, there was only a 0.2% growth in the UK economy in the second quarter of 2008.

The minutes of the two-day MPC meeting, held on 6-7 August, were released today and showed that Timothy Besley wanted to increase the Base Rate from 5.0% to 5.25%. This member of the MPC last month voted for the same course of action.

Mr Besley voted for an increase in rates because of rising inflation, in spite of the fact that it would present “considerable downside risks to growth” the MPC minutes said.

In contrast, David Blanchflower wanted to decrease the cost of the base rate from 5.0% to 4.75%, a move he also voted for in July’s meeting.

Mr Blanchflower felt there was a lower risk to inflation because of the current economic slowdown and so concluded that “an immediate cut in Bank Rate was warranted” the MPC minutes said.