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Inflation overhang could encourage base rate cut

Wednesday 7th May 2008

Simon Ward of economist New Star predicts a split decision in this weeks monetary policy committee (MPC) meeting.

The MPC is the Bank of Englands rate-setting body, comprising representatives of the central bank, government and independent members.

It meets each month to decide whether the base rate of interest should remain at its current level or be shifted up or down.

Mr Ward explains that one of the driving forces behind decisions is the committees obligation to maintain an inflation rate of two per cent.

He suggests that the remit could prove influential in the May meeting, despite calming effects elsewhere in the previously turbulent financial markets.

"The near-term inflation outlook remains troubling, however, with the May Inflation Report likely to show a larger and more prolonged overshoot than projected in February," Mr Ward predicts.

Recent MPC decisions have seen the base rate fall by 0.5 percentage points since the start of the year to stand at a flat five per cent.

The peak rate reached during 2007 was 5.75 per cent, which was put in place in July and remained in effect until December 6th.

Since then a pattern of alternating decisions has been observed, with the MPC reducing the rate by a quarter point every other month.

If such a trend were to continue, Mays decision would see the rate maintained - however, with an Inflation Report due to be published, Mr Ward suggests the committee may not be unanimous in its verdict.

He anticipates a six-three split in favour of leaving the rate unchanged, although he notes that the "shadow MPC" of economists formed by the Sunday Times favours a five-four divide.©

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