Bank of England was split three ways

LONDON (SHARECAST) – The Bank of England’s Monetary Policy Committee (MPC) was split three ways when it met earlier this month to decide on interest rates and quantitative easing (QE), minutes from the meeting show.

It is the first time a three way split has occurred since rates were lowered to 0.5 percent in the wake of the global financial crisis that erupted in 2008.

Seven members of the MPC voted in favour of keeping rates at 0.5 percent and maintaining the asset purchase programme designed to stimulate the economy at £200bn.

However, one member, Adam Posen, wanted to increase the size of the asset purchase programme by £50bn to £250bn, while the hawkish Andrew Sentance repeated his call to hike rates by a quarter percentage point.

The Bank said that the MPC had to contend with two opposing factors; inflation continuing to sit above the two percennt target set by the government and a lack of private sector demand to make up for a reduction in public spending, resulting in the possibility of below-target inflation.

Most members of the MPC thought that no developments during September had been sufficient to warrant a change in monetary policy.

However, Adam Posen thought that spare capacity in the economy was now large enough to warrant an expansion of QE.

Sentance repeated his call for a rate hike, arguing that although some slowdown in growth might be occurring in the United Kingdom and overseas, this had to be seen alongside the strong momentum of growth in the first half of the year. Higher VAT and prices for oil and other commodities were boosting inflation, he said.

Chief European & UK economist at the Forecasting Group IHS Global Insight Howard Archer said the meeting threw little new light on future monetary policy. He maintains his view that the Bank of England will keep interest rates down at 0.5 percent during the rest of 2010 and much, if not all of, 2011, while a revival of QE looks highly possible.