Belfast Telegraph

Monday 1 September 2014

Inflation worries cause Bank split on rate hike

Bank of England rate-setters were split three ways again this month when they left policy unchanged despite mounting pressure on inflation.

Minutes of the December rates meeting suggested increasing concerns among members of the Monetary Policy Committee (MPC) over inflation after it rose again in November to 3.3%.

They said upside risks to inflation had increased, but added that the majority of MPC members continued to believe economic conditions would bring inflation back to target in the medium term.

Andrew Sentance remained the lone voice calling for a quarter-point rise in rates to calm inflation, while MPC colleague Adam Posen reiterated his vote for another £50bn in quantitative easing (QE) to support the recovery.

With the majority backing a "no change" decision, rates were held at 0.5% for the 20th month in a row while QE was maintained at £200bn.

Yesterday's minutes highlight the growing threat of inflation as rocketing fuel costs, energy bills and the impending VAT hike add to the cost of living.

The report showed MPC members "considered the accumulation of news of recent months had probably shifted the balance of risks to inflation in the medium-term upwards".

It added the MPC believed firms were already pushing up prices ahead of the VAT hike to 20%, while "there were signs that global pricing pressures had increased over the month".

But members also noted the outlook for both growth and inflation remained highly uncertain, with the euro debt crisis posing a marked threat to the UK economy.

The MPC said the impact on the UK "could be large" if eurozone troubles hit demand for UK exports and may also lead to a further credit squeeze if bank funding dries up.

The Bank warned in last week's Financial Stability Report that the UK was only "partially insulated" from Europe's sovereign debt woes and pointed towards the need for banks to shore up finances to ward off any threats.

Howard Archer, chief economist at IHS Global Insight, said that while the minutes flagged up MPC fears over the eurozone and inflation, there was little chance of an imminent policy change.

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