Bank of England delays rate rise

Source: Shanghai Daily  |   2008-6-27  |     NEWSPAPER EDITION

BANK of England policy makers calmed market expectations of early interest rate rises, saying yesterday that they wanted to avoid a marked economic slowdown which might pull the inflation rate below target.

While several Monetary Policy Committee members told a parliamentary committee they had considered raising interest rates at their last meeting to keep inflation down, the overall message of the testimony was balanced.

Markets, which have been pricing in interest rate rises this year, moved to discount a lower probability of this happening, especially after BoE Governor Mervyn King said the sharp gyrations in interest rate pricing had been puzzling.

While Monetary Policy Committee members are clearly worried by the prospect of inflation rising past 4 percent this year and feeding into higher wages, they were also conscious that the economy was slowing and this would help tame price pressures.

"The economic slowdown will need to be sufficient to ensure that inflation does not persist above the target. But at the same time, we need to avoid a slowdown that is so pronounced that it would pull inflation down, not just to the target, but below," BoE Governor Mervyn King said.

Five members of the BoE's MPC were giving testimony to parliament's Treasury Committee on the central bank's May inflation report.

"Overall, the various comments from MPC members over recent weeks look like a recipe for the Bank to sit on it hands in the coming months," said Dominic Bryant, economist at BNP Paribas.

Asked about whether he was being dovish or hawkish, King said he did not know what level of interest rates would be required to get inflation to the 2-percent target. His recent comments, he said, were meant to be "balanced."

Even arch-hawk Tim Besley said he was keeping an open mind on rates though he had been thinking about rate rises at both the May and June MPC meetings.

More surprising was the news that fellow MPC member Kate Barker had also considered raising rates this month, as did deputy governor John Gieve and executive director Paul Tucker.

Many economists had thought the numbers of MPC members contemplating rate rises would have been fewer.