June 26, 2007 | posted by Michael Baxter in IABN |

If there is one respect in which economists seem united in praising Gordon Brown, it’s in his decision to make the Bank of England independent. At last, the rate of interest was set to fight inflation, not to deal with short-term political concerns.

But, supposing rates continue their march north? Many economists expect rates to hit 6 per cent, and some are now predicting they will go even higher. Just as he prepares to change jobs, Mr Brown must be sweating a bit.
But, the trouble is that the Bank of England seems split. Some, including Mervyn King, the bank’s governor, worry about the rising money supply, and signs that manufacturers and now even retailers are upping prices.
Others take a more relaxed approach, and point to the fact that the CPI index is set to fall over the next few months, and how wage inflation has stayed muted.
We saw the result of these two views earlier this month when four members of the bank’s monetary policy committee voted to increase the rate of interest, while five voted to keep it on hold.
It was the second time Mervyn King was outvoted, the previous occasion being August 2005 when the bank’s committee went against him and voted to lower rates - a move that, with the benefit of hindsight, appears to have been wrong.
Some say that Mevyn deliberately voted against the majority, in order to reduce expectations of inflation and perhaps to encourage the recent fall in long-term rates.
The argument goes like this. If the market rate of interest moves upwards, and we see a bigger gap between long-term rates and the official bank rate, then the Bank of England may not need to increase rates. So simply by creating the impression that rates may go up, it might not be necessary to increase them.
But not all subscribe to this rather subtle view of rate setting. Others think that what we saw earlier this month was quite simply a divergence in opinions. In which case, they argue, maybe Mr King’s position as governor could be vulnerable. He is due for re-appointment in 12 months’ time. And right now, there is just a whiff of conjecture, that if Mr King continues to lead the bank towards an upward rate of interest, while some members continue to disagree, his re-appointment might not be quite so certain as it would have been.