Monetary doves win through at Bank

The City was last night scaling back its expectations of sharp rises in interest rates after the doves on the Bank of England's monetary policy committee won key concessions over the outlook for inflation.

In its quarterly inflation report, the Bank conceded that it had been too gloomy about the impact of faster growth on prices over the next two years, noting that ferocious competition and the strong pound would help keep the cost of living in check.

Analysts said the Bank now appeared to accept the arguments put by two MPC members, DeAnne Julius and Sushil Wadhwani, that inflation would be more benign than had been thought.

In another concession to the doves, the Bank agreed to find resources to allow individual members of the MPC to commission their own research from Threadneedle Street's team of economists, something that had previously been resisted.

The Bank's deputy governor, Mervyn King, admitted that the Bank had been damaged by reports of the internal wrangle. "I think the publicity about this, the concern about resources, has been damaging."

He said there had been difficulties when individual MPC members had wanted to commission research which was not regarded as a priority by other members, but indicated that he was prepared to soften his previous objections. "That concern needs to be catered for. That is accepted and we will do it," he told a news conference.

Ms Julius said last month that the forecasting methods used during the high inflation of the past two decades were less useful in an era when global competitive pressures were keeping the lid on prices. Mr King said the Bank acknowledged the impact of competition and had cut its forecast of inflation by 0.2 percentage points in each of the next two years.

The Bank has also modified its view that inflation will be stoked up by a hefty fall in the pound. This follows Mr Wadhwani's work showing that sterling may stay relatively strong over the medium term. In its forecast for the next two years, the Bank has split the difference and now takes the view that the depreciation in the pound will be more modest than it had anticipated.

The change will lower inflation in a year's time by 0.1 points and in two years' time by 0.3 points.

The report said interest rates had been raised by 0.25 percentage points in both September and November as "pre-emptive" strikes against the possibility of inflation rising above the government's 2.5% target in the medium term as the economy picks up steam.

Michael Saunders, economist with Salomon Smith Barney Citibank, said the report represented a softening of the Bank's view on inflation. Analysts said interest rates were likely to peak at around 6%.