Loose monetary policy has resulted in strong growth in nominal (i.e. current-price) spending over the last year but this has served to boost imports and inflation more than real domestic production. Higher interest rates would cool nominal spending expansion but could improve the split between real GDP growth and inflation / imports.

Doves argue that the MPC should maintain super-low rates because the economic recovery remains shaky. Monetary policy, however, operates by affecting nominal demand rather than real GDP directly.

"Gross final expenditure" – domestic consumption and investment spending plus exports – rose by a nominal 7.2% in the year to the fourth quarter of 2010 and would have increased by nearly 8% but for December's bad weather. This compares with average expansion of 5.5% per annum in the first 10 years of the MPC's existence (i.e. between 1998 and 2007).

One-quarter of gross expenditure, however, is on imports, which surged by 15.4% in the year to the fourth quarter. So nominal GDP – spending on domestically-produced goods and services – grew by a more modest 4.3%.

With inflation – as measured by the GDP deflator – running at an annual 2.8%, the increase in real GDP was reduced to just 1.5% (about 2% adjusted for the weather effect).

So imports and inflation ate up nearly 6 percentage points of the 7.2% growth in nominal spending in the year to the fourth quarter, resulting in a disappointing rise in real domestic production.

As noted by the MPC's Andrew Sentance, the recent gap between nominal spending and real GDP growth is the largest, except for two quarters in 2006 when trade numbers were distorted by missing trader VAT fraud, since the Lawson boom of the late 1980s – see chart.

Doves argue that the MPC should keep the pedal to the metal to ensure that real economic expansion is sustained. If inflationary expectations ratchet up, however, the pass-through from nominal spending to real production could weaken further. Tighter policy would slow nominal spending expansion but, by ensuring that the current inflation overshoot proves temporary, would improve prospects for a sustained economic recovery.