Bank of England policymakers remain split on rates

Bank of England
Image caption The Bank says inflation could exceed 5% in the coming months

Bank of England policymakers voted six to three in favour of keeping rates on hold at a record low of 0.5% this month, minutes of the Monetary Policy Committee's (MPC) May meeting show.

It is the fourth month in a row that three members have voted for a rise.

The MPC said there was a "good chance" inflation would hit 5% this year.

Following the meeting, it emerged that consumer prices inflation had jumped unexpectedly in April to 4.5% - more than double the Bank's 2% target.

It forced the Bank's governor, Mervyn King, to write yet again to the Chancellor, George Osborne, explaining why the target had been overshot by more than one percentage point.

The release of the minutes coincided with better-than-expected unemployment data, which showed the UK jobless total fell by 36,000 in the three months to the end of March to 2.46 million.

The value of sterling fluctuated on currency markets immediately following the minutes and jobs data release, as traders struggled to draw conclusions about the implications for future monetary policy.

But Jonathan Loynes of Capital Economics said the minutes and latest labour market data had done little to change expectations for interest rate movements.

"Admittedly, the committee had not seen yesterday's worse than expected CPI figures at the meeting but, given the forecast in the Inflation Report that inflation will rise to 5% over the coming months, we doubt they would have had much of an impact," he said.

'Substantial uncertainties'

Mr King has said previously that inflation will rise as high as 5%, and will not fall back towards the target level until 2012-13.

This view was confirmed in the minutes, which said inflation was "more likely than not" to remain above target throughout next year.

This was due to "the increase in the standard rate of VAT, higher energy and import prices, and some restoration of companies' profit margins".

"Despite the fall in CPI inflation in March, the most likely near-term path of inflation was markedly higher than at the time of the February Inflation Report," said the MPC minutes.

However, the minutes acknowledged that there was a "wider than usual" range of views on the committee about which way prices are heading.

The inflation outlook remained sensitive to changes in commodity prices, according to the minutes.

Market prices for energy, foods and metals have seen sharp falls in the past few weeks, amid fears over the strength of the global recovery.

The minutes also noted an apparent disagreement over the economy's growth prospects this year.

"There remain substantial uncertainties, and a wider than usual range of views among committee members, regarding the outlook for growth," said the minutes.

Among these uncertainties were the impact of the income squeeze on UK households, the extent and pace of an expected pick-up in exports, and whether the large profits currently being made by some UK companies would be reinvested.

Outgoing member

Andrew Sentance, for whom the 4-5 May meeting was his last on the MPC, again proved its most hawkish member, voting for a half-point rise in rates to 1%.

From next month he will be replaced by former Goldman Sachs economist Ben Broadbent.

Image caption Ben Broadbent's appointment introduces an unknown quantity into future MPC decisions

Mr Broadbent is an "unknown quantity" according to the BBC's economics editor, Stephanie Flanders, and it is unclear which way he will vote in future meetings.

Martin Weale and Spencer Dale both again voted for a quarter-point rise in rates to 0.75%, while the other members voted for no change.

US academic Adam Posen was again alone in voting for an increase in the Bank's "quantitative easing" programme of buying up government bonds, wanting to increase the stock of bonds held by £50bn to £250bn.

Most commentators expressed little surprise at the repeated voting pattern

"In the highly uncertain environment, it seems the best that MPC members can do is remain in wait-and-see mode," said Hetal Mehta of Daiwa Capital Markets.

However, observers noted that all three of the MPC members who have voted in favour of rate rises continued to do so despite the recent weak growth data.

"The takeaway from this is that [Martin Weale and Spencer Dale] are fairly determined hawks and will be inclined to carry on voting for rises unless there is an even more marked deceleration in growth in the UK," said David Tinsley of National Australia Bank.

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