MPC minutes reveal three-way split

20th October 2010

Asked by BoE governor Mervyn King to vote on maintaining rates at 0.5% and the asset purchase programme at £200 billion, seven members of the committee voted in favour.

Posen voted to maintain rates but increase the purchasing programme. The MPC's leading hawk Andrew Sentance, meanwhile,  again called for an immediate hike in rates by 25 basis points to 0.75% with the asset purchase programme maintained at £200 billion.

According to the minutes of the 6-7 October meeting, the key issue confronting the MPC members was to assess the balance of risks to the prospects for inflation in the medium term.

As in previous months, these comprised, on the one hand, whether the prolonged period of above-target inflation would cause inflation expectations to drift up, making it more costly to eventually bring inflation back to target. 

On the other hand, members had to weigh up whether private sector demand would grow fast enough to make up for cuts in public spending expected to emerge from the spending review today.

The danger on this front being that if the private sector did not step up to the plate, inflation could end up "materially" below target over the medium term.  

For Posen , the evidence so far points to the need for an increase in the £200 billion asset purchase programme.  

He believes the current degree of spare capacity in the economy is sufficiently large that monetary policy can afford to encourage more rapid growth without risking an undesirable increase in inflationary pressures.

Without the additional stimulus, he fears inflation will fall "well below" the target in the medium term.

For Sentance, however, enough stimulus has been provided through the reduction of rates to just 0.5% and the asset purchase programme.

He believes that although some slowdown in growth might be occurring in the UK and overseas, this had to be seen alongside the strong momentum of growth in the first half of the year.

The pace of growth was bound to be variable at early stages of the recovery, argued Sentance at the meeting.  

Holding such a view, Sentance is naturally highly concerned by persistent above-target inflation and fears there could be further upward pressure on VAT increases, and rising oil and other commodity prices.

He believes that failing to respond to persistent above-target inflation, which is forecast to continue for some time, the MPC risk losing credibility and that this would be damaging to business and consumer confidence over the medium term.

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