While the majority of members have continued to take a ‘wait and see’ approach, keeping interest rates at their current record low levels but holding back from additional Quantitative Easing (QE), two members – Adam Posen and Andrew Sentance – have increasingly gone public on their views that a change of approach is needed.
The problem is, they favour a different approach. Noting persistent above-target inflation, Mr Sentance thinks interest rates should be increased to prevent the economy overheating, while Mr Posen argues that since inflation has been caused by external factors – such as increased energy costs and a weaker pound – hiking rates would make no difference, and actually what is required is more QE to prevent the economy falling back into recession.
With such diametrically opposed views on the committee, it is perhaps unsurprising that the end result has been somewhere between the two, but rates cannot stay unchanged forever, so it will be interesting to see which view prevails. Next month sees the increase in VAT to 20 per cent, so a further jump in inflation is inevitable, but if it fails to come down after that, the BoE may be forced to act to maintain its credibility.
However, increasing rates too soon is likely to have a detrimental effect on growth and jobs, leaving the committee with a delicate balancing act. Furthermore, with the government not keen on stimulating the economy through tax cuts or spending rises, that leaves Quantitative Easing as the only means of stimulating the economy if growth does go into reverse.
While the Bank has taken its share of criticism over recent months, there is no doubt that it has a difficult balancing act to perform and it will be interesting to see which school of thought prevails.
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