LONDON (MktNews) - The Monetary Policy Committee of the Bank of England were split over the decision to keep monetary policy on hold in March, with one member still arguing the case for lower interest rates, the minutes pu4blished Wednesday revealed. External MPC member Christopher Allsopp voted for an immediate 25 basis points cut in the repo rate, while the other eight members of the committee wanted to keep rates unchanged.
Arguments, though, were pu4t forward by MPC members for cutting or hiking rates as well as for leaving them unchanged. The case for raising rates was that higher RPIX inflation over the short-term could push inflation expectations above target and this could boost wag4es, which would in turn feed through into prices.
And the recent depreciation in the sterling exchange rate, "might have a significant impact on the price level and net export demand, were it to persist," the minutes said. Some member4s agreed that the decision whether the repo rate should be higher was finely balanced.
"For some other members, the arguments for a repo rate of 3.75% as opposed to 4% were more finely balanced, but a decision to increase the repo rate so so4on after a reduction last month, would, in current circumstances, risk having a greater-than-warranted effect on market interest rates," the minutes said. Other members stressed that the exchange rate depreciation might not persist, particul4arly if it was linked to the Iraq war. "If those fears were quickly allayed, sterling could strengthen again," the minutes said.
While the higher profile for RPIX in the short-term might push up inflation expectations, evidence from b4ond markets so far showed that expectations had not deviated from the 2.5% target, and pay settlements were not rising. Some members also argued that the pass-through to retail prices from sterling's depreciation might also be small, given e4xperience in other countries. Arguments for a cut stemmed from weaker-than-expected demand prospects and the possibility household consumption was slowing more sharply than expected.
It was also possible the recent falls in consum4er and business confidence were not as closely linked to Iraq as many had suggested. Allsopp, the only member to vote for an immediate easing, argued that inflation was likely to fall below the 2.5% target in the medium term and that a furth4er reduction in the repo rate was needed to achieve the inflation target. Other members were not convinced enough by the arguments for a rate cut.
"It was very important that inflation expectations should remain anchored to the 2.5%4 target. A further reduction in rates so soon, at a time when RPIX inflation was likely temporarily to rise further above the target, might dislodge that anchor." Some members also saw the slowdown in household consumption growth as "tentati4ve" and that confidence was in fact being hurt by the Iraq war and could bounce back. Also, the Budget was due in a month's time and it "would be sensible to wait for any new information it might contain about the fiscal stance." //www.marketnews.com