Bank of England Faces Divided Opinion on Interest Rates as Inflation Persists

The Bank of England is facing mounting pressure to keep interest rates unchanged amidst persistent inflation and burgeoning financial stability concerns. The Times shadow monetary policy committee, a group of economic experts regularly polled by the publication, delivered a narrow five to four majority in favour of holding the base rate at four percent in December. This verdict echoes the Bank’s closely contested decision in November.

Deliberations occurred before the latest data which revealed a rise in the unemployment rate to 5.1 percent and prior to the release of new consumer price inflation figures. Recent votes underscore a pronounced split among committee members. Some are concerned that inflation will stubbornly remain above the Bank’s two percent target, while others believe price growth will ease and are urging action to support the flagging economy.

Andrew Sentance, former external member of the Bank’s committee, warned that another rate cut while inflation is still almost double the target would threaten the Bank’s credibility and commitment to stable prices. Karen Ward, chief market strategist at JP Morgan Asset Management and former adviser to the Treasury, advocated for keeping rates steady during the first quarter, a critical period for wage negotiations. Early signs point to continued upward pressure on wages, further complicating efforts to return inflation to target levels.

Concerns are heightened by the Bank’s own recent financial stability report, which highlighted credible risks on the horizon. Sir Steve Robson, a former senior Treasury official, argued that a further rate reduction would contradict these warnings. The sentiment was echoed by Sir John Gieve, a former deputy governor, who asserted that high inflation could persist for more than eighteen months and called for caution before any cut is made.

However, not all are in agreement. Economists Bronwyn Curtis and Kitty Ussher from the shadow committee proposed lowering the base rate to 3.75 percent before year end, citing receding inflation risks and cautious consumer spending in recent months. Martin Weale, a former rate-setter, also backed a cut, noting a growing risk that inflation could fall below target soon. Professor Charles Goodhart, a long-standing voice in the monetary policy sphere, narrowly favoured a reduction, observing a prevailing pessimism about the UK economy that could itself dampen economic activity. Goodhart noted that recent rate cuts by the US Federal Reserve provided some impetus towards a parallel move in the UK.

The committee’s debate takes place as official forecasts suggest inflation could drop to around 3.4 percent for November. Government measures including energy bill tax reductions and fuel duty freezes are expected to decrease consumer price inflation by half a percentage point next year. Despite these projections, policymakers remain divided over whether a cautious pause or measured easing is the best path forward amidst uncertain economic signals.