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Groundhog Day may indicate rate peak

20th August 2008 | back to article listings BACK    print this article PRINT

Earlier this week Bank of England monetary policy committee (MPC) member Professor Tim Besley wrote an article for the Sun, explaining the role of the MPC and why it has not been cutting interest rates since the economy has started slowing down.

The professor invoked the 1970s as he talked Saturday Night Fever, Starsky and Hutch and high inflation. Whether each of these was as disturbing as the others is a matter of personal taste, but his point was clear: If the MPC cuts rates too soon the risk will be that it will fail in the job it was assigned to do in 1997 of keeping inflation down, taking Britain back to the past as a result.

What Tim Besley did not mention in the article was that his view on keeping rates higher to hold inflation back is a more hawkish one than that of any of his colleagues. At the time he penned the article he knew what the outside world did not - that for the second month running he was the one member of the MPC to advocate a rate rise to 5.25 per cent.

In fact, the minutes of the August MPC meeting were a truly 'Groundhog Day' affair. Just as the same sole individual supported an increase, so David Blanchflower continued his lone vigil in favour of a cut. In between, the other seven also did exactly as they had in July and voted to hold the rate. Add to that the fact that it is now four months in a row that the rate has been kept at five per cent, plus the familiar explanation in the minutes that there were acknowledged to be both upside and downside risks to inflation and a sense of deja vu could be justified.

On the other hand, one could invoke the saying that the more things change, the more they stay the same. What has been rapidly changing is the consumer prices index - in an upward direction. Yet this very fact and the unchanging verdicts from the MPC may be a critical point for those investing in property. If the biggest fear is a rate rise that could increase buy-to-let mortgage rates and other costs, while the biggest hope is that inflation will soon fall and enable the reverse to happen, it may be that the latter is now the more likely.

Inferences can only be tentative, but what is certain is that, despite inflation rising since last month and a far from upbeat quarterly inflation report, Tim Besley has not managed to persuade a single one of his colleagues to join him in the stance he first took at the July meeting.

This does not, of course, mean that a rate cut is imminent; David Blanchflower is just as isolated at the moment. But the possibility may well be that the majority of the MPC is sitting tight, waiting and hoping that inflation will, as the central projection suggests, peak before too much longer and then start falling. If so, not only will a rate rise be avoided, but the hoped-for cuts can then start.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4337.html. Alternatively, please see our full press release archive.

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