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Wednesday, November 17, 1999 Published at 11:59 GMT


Business: The Economy

Bank considered bigger rate rise



The Bank of England's Monetary Policy Committee (MPC) voted overwhelmingly in favour of raising interest rates by 0.25% a fortnight ago.

The committee of experts voted eight to one for the rise - with some of the debate at their two day meeting focusing on whether to post a larger 0.5% rise.

The tone of the discussion and the vote showed stronger support for the rise than had been expected by the City.


[ image: Chancellor Gordon Brown has set the MPC an inflation target]
Chancellor Gordon Brown has set the MPC an inflation target
Together with Tuesday's US rate rise, and fresh wages and jobless data, it suggests a further rise may come sooner than thought.

The minutes of the meeting reveal that the sole dissenter was DeAnne Julius, the MPC's most prominent dove, who preferred instead to keep rates on hold.

The minutes show that a number of members discussed the merits of a larger rise in rates.

But survey evidence pointing to a slowing of demand growth, and the likely reaction of the pound to such a move, led them to plump for a smaller rise.

Chancellor Gordon Brown has set the MPC the task of using interest rates to keep the inflation rate in the UK as close as possible to 2.5%.

The target is symmetrical - in other words inflation 1% below the target is as worrying as 1% above target.

Reports of a split

In simplistic terms, the MPC increases rates when it suspects inflation is likely to go above the target rate, and reduces rates if an undershoot is predicted.

The calculations are complicated by the theory that it takes about two years for a change in rates to have its effect on inflation.

During that time a range of factors - from the Millennium Bug to an unexpected economic shift such as the Asian crisis of last year - could make predictions swiftly outdated.

The committee is made up of nine members, five from the Bank of England and four independent economists.

The committee meets for two days each month to review the latest economic and business surveys and data before deciding whether to alter interest rates.

In recent weeks there have been increasing reports of a split between the independent members and the Bank's own members - largely centred on the lack of research staff available for the outsiders.

But, as last month when there was a unanimous vote in favour of holding rates, it seems that the split on rate policy was not as wide as reported.

The minutes said a policy tightening was needed to restrain medium-term inflation from implications of continued strong demand.

"Activity had recovered faster than expected, and confidence indicators had remained strong despite the September tightening of monetary policy and sterling's recent strength," the minutes said.

Certainly low, uncertainly high

The MPC believed that the dampening effects of a strong pound on inflation were diminishing. But the committee faced the dilemma between downward influences on prices and "the more rapid than expected pick-up in output growth," the minutes state.

In the end the MPC opted for a quarter point rise following survey evidence there might be some slowing in demand growth. There were also concerns a larger rise would put upward pressure on the pound.

DeAnne Julius, a former British Airways economist, argued that a rise was not necessary because the bank's own predictions were for inflation to remain below the target rate for much of the forecasting period.

The rest of the committee backed the rise, with the minutes suggesting that it was a pre-emptive move which would reduce the risk of a larger rise to come.

However the committee said the degree of uncertainty about the inflation outlook was greater two years out than in the short term.

So it was less sure about the projected steep rise to come than the nearer-term prospect of inflation remaining below target.



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