BoE MPC voted by 7-to-2 margin to keep repo rate unchanged in April UPDATE

BoE MPC voted by 7-to-2 margin to keep repo rate unchanged in April UPDATE

	Published : Wed, 18 Apr 2007 10:09 By : Agencies Print this Story

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LONDON (Thomson Financial) - The Bank of England's Monetary Policy Committe voted by a 7-to-2 margin to keep the benchmark repo rate unchanged at 5.25 pct earlier this month, the minutes of April's meeting revealed.

The rate setters appeared to be split into three broad camps. A first more dovish group felt that inflation will fall back, a middle group reckoned there was a need to wait-and-see, delaying a hike until May, while the last was more hawkish, preferring an immediate rate increase.

The two dissenting votes, calling for a hike to 5.50 pct, came from the panel's latest recruits Tim Besley and Andrew Sentance, who are both fast gaining a reputation as hawks.

For them, the risks to inflation were on the upside and therefore warranted a rate hike immediately. They cited strong consumption, business investment and global demand alongside healthy profitability. Additionally, they noted that firms were confident about putting up prices and that money and asset prices also threatened to push inflation higher.

For the middle camp of rate setters, a hike was not justified in April even though they felt the risks to inflation remained on the upside especially due to elevated levels of producer prices in both the manufacturing and services sectors. Still, they felt it was time to wait-and-see as markets were not expecting a rate hike in April.

'Any change would also be better explained in the context of the May Inflation Report projections,' they said.

Markets widely predict a hike in May, coinciding with the central bank's next round of projections for growth and inflation in the Inflation Report.

The rest of the MPC, however, were more dovish, saying there was 'no compelling case' for an April rate hike. They cited the uncertain outlook for the US economy and for consumer spending in the UK. While there were risks to both sides in the outlook for inflation, they expect inflation fall back over the next few months.

To some extent the minutes have been overtaken by events. Yesterday, it was revealed that the CPI annual rate jumped to an all time high of 3.1 pct, cementing predictions of a quarter point hike to 5.50 pct in May. The inflation surge also triggered an unprecedented event. Bank of England governor Mervyn King was forced to write an open letter of explanation to Chancellor of the Exchequer Gordon Brown. King said that the rate setting panel will look through short term volatility in inflation and maintained that he expects inflation to ease back over the coming months.

The minutes also revealed that the MPC was less concerned about wage pressures than previously. It noted that pay deals have continued to be relatively benign although it noted differences in opinion about the degree of slack in the labour market.

sivakumar.sithraputhran@thomson.com

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