Between a rock and a hard place

The Monetary Policy Committee split three ways at the July meeting - the result of course being that rates were left on hold at 5% for a further month. The minutes of the meeting make for fascinating reading providing as they do a generous overview of the most recent macroeconomic developments both here and overseas. I was struck by the emphasis given in most of the rate setting variables to the increasing flow of evidence from survey data - be it reports from the Bank’s own regional agents on conditions on the ground in the real economy, to survey information from the property market, employers’ organisations and data on business and consumer confidence and expectations.

The Bank is truly at the moment between a rock and a hard place - the case for a rate hike was sketched as follows:

“Although it could do little to alter the path of inflation in the near term, the Committee could, by raising Bank Rate this month, send a strong signal that it was focused on inflation and remained determined to bring it back to target in the medium term.”

And here is the fear of following that course of action:

“An increase in Bank Rate in the current circumstances, when confidence was low and the financial sector fragile, could impart a downward momentum to the economy that risked a significant undershoot of inflation in the medium term.”

Voting for no change
The Governor
Charles Bean
John Gieve
Kate Barker
Spencer Dale
Andrew Sentance
Paul Tucker

Voting for a rate hike
Tim Besley

Voting for a rate reduction
David Blanchflower

My own view is that I think we will see base interest rates coming down quite sharply in the second half of 2009 if the economic downturn turns into something much deeper. Lower oil prices will help to bring down CPI and RPI inflation over the next twelve months and we can only hope that the forecast super-spike in household energy prices is not as bad as feared.