The Bank of England (BoE) Monetary Policy Committee (MPC) has been shaken by the ‘increase in inflationary risks’ which if continued will lead to interest rate rises in the New Year.
MPC members also discussed reports that companies were already raising prices ahead of an increase in VAT to 20 per cent in January.
The minutes of the last MPC meeting of December 8-9 stated that there were ‘considerable differences among committee members in the extent to which they had revised their views of the overall balance of risks to the medium-term outlook for inflation’.
One of the committee’s nine members, Andrew Sentance, continued to call for a rise in UK interest rates.
Sentance again voted for rates to go up to 0.75% from 0.5%, where they have now remained for 21 consecutive months.
Another MPC member, Adam Posen, voted for the third month in a row for the Bank’s £200bn programme of quantitative easing to be expanded by £50bn.
The majority, though, remained paralysed saying they saw ‘sizable’ inflationary as well as disinflationary risks.
However, the minutes stated: ‘Most of those members considered that the accumulation of news over recent months had probably shifted the balance of risks to inflation in the medium term upwards.’
The minutes underscore the balance that BoE policy makers seek to achieve, between fostering a sustainable economic recovery and preventing inflationary shocks.
The Minutes revealed MPC members’ concerns that the eurozone sovereign-debt crisis raises the risk that private-sector demand won’t be strong enough to compensate for aggressive fiscal austerity measures.
While the MPC minutes stated that the ‘persistent period of financial market distress’ is unlikely to have a big direct impact on demand for UK exports, MPC members believed, it could have a negative influence on business and consumer confidence in the UK and beyond, and on the ability of UK banks to raise funding.
The minutes stated: ‘The likelihood of these events occurring was hard to judge, but their impact could be large.’