My MPC-ometer suggested a 6-3 vote for a quarter-point rate cut in April, in line with the Sunday Times Shadow MPC. Today’s minutes reveal a 6-2-1 split, with Tim Besley and Andrew Sentance voting for no change and David Blanchflower for a half-point move.
There has been only one previous occasion of a three-way split in a month when the MPC has changed interest rates – January 1999, when rates were again cut by a quarter-point. Three-way splits also occurred in May and August 1998 and May 2006; rates were left unchanged in all three cases.
The minutes imply a further cut could be delayed until July or even later. Besley and Sentance will remain reluctant to ease aggressively until inflation expectations moderate – unlikely before late 2008. Within the majority group, some members voted for a reduction this month to keep policy consistent with the gradual easing path implied by the February Inflation Report projections. On this view, additional action may not be needed until August.
There are also hints of greater concern about exchange rate weakness, arguing for going slow on rate cuts. According to the minutes, a fall in the real exchange rate caused by an increase in the risk premium on sterling assets “would tend to boost net trade and warrant a more pronounced slowdown in domestic demand growth in the near term than otherwise”.
With inflation risks rising, the MPC is right to discourage hopes of rapid rate cuts but sharply weaker economic news or further financial woes could yet force the Committee's hand.