MPC 'on hold' over interest rates

All nine members of the Bank of England's monetary policy committee agreed to keep interest rates at 4.5% this month amid more uncertainty than usual about inflation, minutes showed today.

Minutes of the meeting, which took place over November 9 and 10, revealed that the MPC did not discuss either a rate cut or rate rise in deciding to keep rates unchanged for the third month running.

The minutes also reveal a heightened sense of uncertainty both on growth and inflation. On growth, the minutes stated: "There was a range of views among individual members concerning the likely pace of demand growth over the forecast period."

They go on to say that some members believed the greater risk was that economic growth would be weaker than anticipated.

As for inflation, where the Bank has a 2% target, the minutes said there was "more uncertainty than usual", although there were no signs, as yet, that higher energy prices had fed through to the rest of the economy.

But the MPC noted that January was an important month for pay settlements in the private sector and said it would carefully monitor any effects from higher energy prices.

"The disagreement among members over the GDP outlook persist but for now there is a near-term truce as the committee awaits evidence on the pay settlement round which starts in January," said John Butler of HSBC.

The importance of pay deals of January was cited by MPC member David Walton in an interview with the BBC radio's Good Morning Ulster programme in Northern Ireland.

"Inflation has been above target and so we are very focused on ensuring it does come back to the target as we move forward from here.

"We are very keen to make sure there are no second-round effects from higher oil prices. What that means is that we will be watching wage settlements over the winter months to ensure that there is no pick up in wage inflation."

Mr Walton's comments were not broadcast but provided by Reuters.

Although inflation has been above the Bank's target for some months, inflationary worries eased recently as the annual rate of inflation fell to 2.3% in October from 2.5% in September, its highest level since 1997.

Mr Butler said the probability of an acceleration in wage rises was slim and less than a year ago, especially as retail price inflation (RPI) - the key benchmark for pay - was one percentage point lower than this time last year.

"Overall, the MPC are on hold," he said. "If wage growth accelerates the MPC bias will be towards tightening. If not, then the focus will shift back to the lack of growth and uncertainty about the demand outlook. We are in the latter camp."

Other economists also believe that the Bank is still too optimistic in its growth outlook in the context of reassuring data on consumer price inflation, producer prices and wages earnings growth.

"We believe that a 25 basis point interest rate cut in February remains a very realistic possibility," said Howard Archer of Global Insight.