Bank schism on interest rates leaves forecasters in confusion
The FTSE 100 moved above 6,300 for the first time in six years yesterday after the Bank of England sent analysts forecasts haywire by disclosing that its surprise interest rate rise this month was decided on the narrowest of margins.
Mervyn King, the Banks Governor, used his casting vote on the Monetary Policy Committee to push through higher rates, minutes of the meeting showed.
The pound fell sharply against the dollar while gilt-edged stocks and interest rate futures rose as forecasters backtracked on previous bets that interest rates could climb to 5.75 per cent by the summer. The FTSE 100 closed up 87.2 points at 6,314.8.
The optimism came despite stronger than expected GDP figures. The economy grew by 0.8 per cent in the fourth quarter, official data showed, for a 3 per cent year-on-year rise, the strongest growth in more than two years. In other circumstances those figures, which reflected healthy retail sales in the run-up to Christmas, might have been seen as a pointer to higher rates. But the m?l?e among the MPCs members, which included the Banks leading hawk, Paul Tucker, voting against tighter policy, provoked bewilderment among City economists.
David Brown, of Bear Stearns, said the Banks hints of the future path of rates were now clear as mud.
Philip Shaw, of Investec, said: We were in the dark before the minutes and were even less clear now.
Peter Newland, of Lehman Brothers, said that the 5-4 decision, together with comments by the Governor that inflation might fall back quite sharply later this year, had lowered the chances of another rate rise next month. However, he forecast an increase in March. Other analysts said the next rise could come in April, or not at all.
The five Bank staff who comprise the internal members of the MPC usually are more hawkish than the four externally appointed members. But January was the first meeting in the MPCs history in which rates went up despite a majority of Bank insiders voting against it. The minutes showed that the dissenters were worried that putting up rates in January could shift market interest rates too high and would risk looking like a short-termist response to a temporary spike in inflation. However, the majority argued that an early move in rates could prevent higher rates later.
The vote also broke new ground because on all previous occasions the Governor has used his casting vote to preserve the status quo. Matthew Sharratt, of Bank of America, said: King has professed the ambition to make policy boring and predictable, but he has done the opposite. He was the swing vote that surprised the market.
The gang of four who dissented
David Blanchflower
US-based economist who joined the MPC last summer. Flies in from New Hampshire each month to attend the Banks meetings, and has voted so far each time against higher rates. Upbeat assessment of slack in economy sets him against rest of MPC
Rachel Lomax
Low-profile Deputy Governor for Monetary Stability is seen as a dove so vote against tightening no surprise. Surprise rate move last month has tested her view that MPCs two meetings between the quarterly Inflation Report months are unnecessary
Paul Tucker
External Director for Mark seen as most hawkish MP member so his vote this month very surprising. because he has never bef voted for lower rates than Mervyn King since he bec Governor in July 2003
Charles Bean
Chief Economist cast in ro of swing voter on MPC. In split vote of August 2005 when King was outvoted for first time, Bean threw killer punch as the only Bank staff member to vot for lower rates
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