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July 20, 2005

The Bank Of England Divided

From the Financial Times:

Sterling fell in European morning trade on Wednesday as minutes from the last meeting of the Bank of England’s rate-setting monetary policy committee intensified expectations of imminent interest rate cuts.

The minutes revealed that the MPC voted by a margin of just 5-4 not to cut rates by 25 basis points to 4.5 per cent at its meeting on July 7...

The quartet who voted for an immediate rate cut, including Charles Bean, the chief economist, cited weakening consumer activity and the likelihood that inflation will fall below the Bank’s medium term target of 2 per cent.

The London Times Online gives further details on the dissenters:

The doves on the committee included new member David Walton, the Goldman Sachs banker who replaced Marian Bell as a member this month.

Mr Walton joined converted hawk Charles Bean and Kate Barker and Stephen Nickell in recommending that the interest rate be reduced by 0.25 per cent. Mervyn King, the Governor of the Bank of England, voted to hold rates steady with four other committee members.

The meeting was in fact held on the day of the London bombings, but that does not, apparently, explain the building sentiment for a rate cut:

"The decision on interest rates was reached solely on the economic merits, and no committee member argued that it should be altered to reflect unfolding events."

The committee would have had the option of holding an emergency session later if evidence had grown that the attacks would have had a long-lasting economic impact. That turned out not to be the case.

For their part, the "hold steady" camp were not convinced that the U.K. soft patch is here to stay:

... the Bank said that the members who wanted no change in rates pointed, among other things, to the lack of clarity about the consumer downturn, which has life on the high street extremely difficult for many retailers.

"More generally, it was unclear how deep and persistent the consumer slowdown would prove to be. There was no indication that economic growth was set to weaken materially in the near term, either in the United Kingdom or in its major trading partners," the minutes stated.

If you'd like to read the full report, just follow this link.

July 20, 2005 in Europe | Permalink


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