Bank team split on need for further rate rises

Eddie George, Governor of the Bank of England, admitted yesterday that he would have voted to raise interest rates, rather than leave them unchanged, in January if Gordon Brown had not relaxed the inflation target to a range around 2.5 per cent from the previous target of 2.5 per cent or less.

But evidence from four members of the Bank's Monetary Policy Committee to the House of Commons Treasury Committee yesterday suggested that there is still a difference of opinion about whether or when rates will need to rise again.

Mr George said: "I would have voted to raise rates in January on the old basis of 2.5 per cent or less." The choice of target was a matter for the Chancellor, he said. The new target is for a range of 1 per cent either side of 2.5 per cent, effectively translating into a band of between 1.5 per cent and 3.5 per cent.

Even so, Mr George emerged from the session sounding reluctant to increase borrowing costs, though he did not say so explicitly. He defended the MPC - which voted not to increase rates either last month or this month - against the charge of inconsistency despite the Bank's new forecast showing inflation likely to be above 2.5 per cent in 2 years' time.

There were great uncertainties, the Governor said. He added: "We would not want to crush domestic demand tomorrow... That would be to plunge the economy unnecessarily into recession."

He also said there had been much greater concern at the turn of the year about how the Asian crisis would affect the rest of the world. The fear of a full-blown financial crisis had receded since then, he said.

Mr George said this week's strong retail sales figures had to be seen in the context of big seasonal swings. "I don't think you can say it influences things decisively one way or the other," he said.

Mervyn King, one of the Bank's Deputy Governors, said he had also voted to wait and see in January. "There were enormous uncertainties at that stage," he explained.

Charles Goodhart, an external MPC member who favoured a rate increase last month, told the MPs: "Waiting in the hope that uncertainties will be resolved is pretty fruitless." Another member, Willem Buiter, agreed. "Moving earlier is superior to moving later," he said.

Mr King said the split vote should have come as no surprise. "When the judgement is so finely balanced, it is the most natural thing in the world for people to disagree," he said. He insisted there was no pressure on "inside" Bank members of the MPC to vote together.

Mr George said the February Inflation Report showed a higher forecast for inflation than the November Report because the effect of the strong pound had not worked through to retail prices as quickly as expected.

The Bank's experts told the MPs wage pressures now presented the biggest concern about inflation. "We are nervous that the labour market is at a point where we may see an acceleration in pay and earnings," the Governor explained.

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