The minutes of the latest Monetary Policy Committee meeting show just one of the nine members of the committee voted to reduce the interest rate when they met at the beginning of December.
Eight members, including the governor Mervyn King, and the two deputy governors Rachel Lomax, and Andrew Large, all voted in favour of maintaining the base rate at 4.5%.
Arguments used to justify the decision included that the recent weakness in manufacturing perhaps posed a “near-term downside risk to the central projection for GDP”.
The minutes revealed that “some members remained of the view that the risks to the central projection for GDP were weighted somewhat to the downside in the second half of the forecast period, reflecting doubts about the profiles for investment and net trade”.
Some of the committee members also suggested that it was too soon to be confident that the price of oil had peaked, and that it was unclear how the price of gas would evolve in the coming months.
No change in the rate was also justified by some of the committee on the basis that the stance of monetary policy “as currently mildly accommodative; this was appropriate as the economy appeared to be operating at a little below capacity and inflation expectations seemed to be well anchored to the target”.
But, Stephen Nickell argued the case for an immediate reduction in the base rate of 25 basis points, as the central projections for investment growth and net trade in the November Inflation Report profile for consumption growth seemed optimistic.
In addition the argument to reduce the rate stated that as government consumption spending was likely to slow from 2007 and that there “were no signs that the rapid rise in both oil process and average tax rates since early 2004 had fed through into wages”, the implication is that CPI inflation was likely to undershoot the 2% target in the medium term.
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