Most members of the SMPC felt that the arguments for and against a change in interest rates were finely balanced. There has been a significant rise in energy prices, but overall inflation was still subdued. Against this, there is evidence that economic activity is recovering again, while the continued high level of UK money supply growth concerned a number of members. There were few risks arising from the international economic background unless energy prices continued to rise.
Although the majority of members voted for no change in interest rates, and no members voted for an immediate increase, several members felt that interest rates would have to rise in the future, as a result of the medium-term impact of rapid broad money growth.
Tim Congdon said “The choice is between a modest rise in rates now or a more drastic one later”, but he believed that rates should be left where they were this month. David Smith, Chief Economist at Williams de Broë, suggested that he would not be surprised if rates had to rise before the year end. John Greenwood, Chief Economist at AMVESCAP, said “There is no case for a rate cut, but rates should be held at the current level for the current time.” However, two members, Andrew Lilico of Europe Economics and Peter Warburton of Economic Perspectives, wanted an immediate rate reduction of ?%.
Members of the SMPC were concerned that policymakers and commentators are focusing on ‘core inflation’ and therefore omitting from consideration key parts of price indices that relate to the underlying cost of living. This is particularly problematic when energy prices are rising rapidly for reasons that are not cyclical; in such circumstances, core inflation may understate underlying inflation and the policy stance will be too loose.
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