February 21, 2008 | posted by Michael Baxter in rate of interest |

It was another day on the roller coaster for members of the Bank of England’s Monetary Policy Committee yesterday.

You may recall, last week the bank released its quarterly inflation report – and what a downbeat report it was too. It dropped a hint that in the shot-term inflation may rise by more than one full percentage point above target, but that in the longer term there was real danger of its staying above target too. The Bank’s governor, Mervyn King talked about a difficult balancing act.

So that’s the backdrop, this is what happened yesterday.

First off the blocks were the latest minutes from the Bank of England Monetary Policy meeting which reduced the rate of interest by a quarter of a per cent to 5.25 per cent.

And here is the oddity, while the Bank has been warning about the dangers of inflation, and has been trying to dampen our expectations for big rate cuts this year, one of the MPC members, David Blanchflower voted for a half a per cent cut. The rest all voted for a quarter of a per cent cut.

Now Mr Blanchflower, also called Danny Blanchflower, although we are sure he never managed Tottenham Hotspur, has always been the committee’s arch dove, in fact he has voted for a rate cut in the last five meetings. But the fact he voted for such a sharp fall in rates, when the Bank was trying to portray a “steady as she goes” type image, shows how contentious this whole issue is.

Then yesterday two pieces of data were released telling a quite contradictory story.

The news from wage land is good. According to a Bank of England survey, private sector pay settlements are expected to average just 3.3 per cent in 2008.

But, the news from manufacturers is not so good. According to the latest industrial trends survey from the CBI, a balance of 22 per cent of firms told the CBI that they expect their domestic prices to go up over the next three months. Now that is worrying, because if you correlate past CBI findings with the official figures published three months later, you will find that the CBI score suggests that manufacturers’ output inflation, already at a 16-year high, has much further to rise.