City News Desk

The Bank of England this week is meeting to decide whether to leave interest rates at the current levels or increase rates to quell rising inflation, with the "the Shadow Monetary Policy Committee (SMPC)" voting by five votes to four to raise Bank Rate to 1% on 10th February. The four minority SMPC members all voted to hold Bank Rate at ½%.

The five SMPC members who wished to increase Bank Rate did so for three main reasons. One was the threat to the credibility of the UK’s counter-inflation framework if the Bank continued to ignore persistent overshoots of the 2% Consumer Price (CPI) inflation target, especially when the inflation rate perceived by many people was the 4¾% or so recorded by the various retail price measures. Another was the view that the aggregate global economy was closer to overheating than depression. The third reason for a rate rise was the belief that the depreciation of sterling had not been an exogenous ‘Act of God’ but that it, instead, reflected the relative laxity of Britain’s monetary stance compared with other countries.

Several factors explained why four SMPC members thought that this was not a time to raise Bank Rate. One fear was that the economic recovery was so anaemic that it would be de-railed by the additional business uncertainty generated by even a small hike in Bank Rate. Another concern was that the UK banking system was so fragile that it would be incapable of generating sufficient money and credit to support recovery if the official rate went up. Both doves and hawks agreed, however, that the Basle III proposals on bank regulation were perversely pro-cyclical and risked reduced global supplies of money and credit leading to a renewed global recession. Finally, there was a fear that the hike in Value Added Tax to 20% would squeeze living standards even further, depressing household consumption.