Outlook: It's only a quarter-point, but it could be crucial

IT HAS taken them six months longer than it should have, but the Monetary Policy Committee has finally plucked up the courage to increase borrowing costs in the face of the near-united opposition of industry, unions, politicians and more than half the City. The degree of complaint yesterday was out of all proportion to the impact a quarter-point rate rise will have on the economy.

This almost certainly reflected the shock of any upward move at all, given that none was expected after last month's exceptionally dovish Inflation Report. After all, the MPC took no action after February's hawkish report. Many in the City will therefore have been caught out in the futures market.

Yet, as the Bank has been careful to point out over and over again, the policy decision has remained finely balanced. Since January the balance, for the committee, has tilted towards inaction. This month it tilted the other way, prompting the MPC to make a pre-emptive move against pay pressures and a domestic economy that remains robust despite signs of impending slowdown.

The fascinating question for Bank-watchers is exactly how that balance was reflected in the votes on the committee. Most leapt to the conclusion that Charles Goodhart changed his mind back to favouring a rate rise because of the latest disappointing earnings figures, and that the new kid on the block, John Vickers, turned out to be a hawk too.

If so, the professors outvoted the rest - with Eddie George in the minority group. But it is hard to imagine the Governor would want to find himself on the losing side of a vote, and he might have changed his mind too.

Whatever the voting arithmetic, yesterday's small move will not have a big direct impact on the economy. Its indirect effects will depend on how sterling reacts over the next few days rather than the first few minutes. Once over the initial shock, the markets might yet conclude that UK interest rates have now peaked. They might even decide the Bank's hawks are right about medium-term inflationary dangers.

And while life is no picnic for manufacturers, other less vocal parts of the economy are slowing only very gently. Some sectors, like IT and construction, are sure to boom until the millennium. A quarter-point rate rise will not be enough to make the difference between a soft landing and a hard one for the economy but will, with luck, make the difference between missing the inflation target and hitting it.