Blog
Divisions with the MPC - Blanchflower v Besley
30th August 2008
Within the nine members of the Monetary Policy Committee, a clear divide has opened up between two of the members - at present they appear to be both on their own with little support from the remainder of the interest-rate setting panel. Who will gather enough support to move interest rates in their preferred direction?
On one side sits Professor David Blanchflower, a specialist labour market economist, who believes that the downside risks to economic growth are much greater than the dangers of an inflationary spiral. In recent monthly meetings of the MPC (including this one in August) he has voted for a 25 basis point (i.e. 0.25%) reduction in official interest rates. Yesterday he went public with his concerns for the health of the British economy. The BBC reports that Blanchflower has called for quick and vigorous interest rate reductions to lower the chances of a deep slump. “His unemployment forecast would mean 330,000 more people losing their jobs by the end of the year and he urged the central bank not to be complacent and to act quickly.”
On the other flank sits Professor Tim Besley from the London School of Economics - an economist whose major concern at present is the risk that the Bank of England is losing the battle to keep inflation in check. He has been voting for interest rate increases (a tightening of monetary policy). Whilst a return to the high and volatile inflation of the 1970s and 1980s looks unlikely, Besley sees some serious inflationary pressures accumulating as the age of cheap energy and food comes to an end. This BBC report provides background on a recent speech by Besley.
For the moment, the remaining seven members of the MPC have been content to sit on their hands and keep official UK base interest rates at 5% but for how much longer? Which way do you think it is going to go? For the record, I feel that the MPC will have to act to lower rates once, possibly twice before the turn of the year.
Two linked points:
The Times / Bank of England Two Point Zero competition kicks off again in a few weeks time.
And Tim Besley is scheduled to given the annual public lecture at the Royal Economic Society later on this autumn - details will be available here
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.