Rachel Lomax, the Bank of England’s deputy governor for monetary policy, cast further doubt over the likelihood of another interest-rate rise soon by voting against this month’s rise from 4.75 to 5 per cent.
Minutes of the Monetary Policy Committee’s two-day meeting on November 8-9 reveal that Ms Lomax’s main worry was the risk that weakness in the American economy could trigger weaker demand in Britain. This concern is unlikely to be resolved before the spring.
Hitherto Ms Lomax had voted with Mervyn King, the Governor, at every MPC meeting since her first, more than three years ago. Her surprise vote against the rate rise may, therefore, reflect wider doubts in the committee. She joined David Blanchflower, whose dissent was expected, in a 7-2 split in the MPC vote.
The majority voted to fulfil market expectation, assumed in the November Inflation Report, that rates would rise to 5 per cent.
George Buckley, chief UK economist at Deutsche Bank, said: “Ms Lomax had in the past on two occasions voted in favour of tighter policy than the Committee, but never for more lax policy.”
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Both members cited spare capacity in the labour market in their decision to opt for rates staying on hold.
Howard Archer, chief UK economist at Global Insight, said: “It is a surprise that Rachel Lomax joined David Blanchflower . . . Blanchflower was clearly always going to be a dissenter, given his belief that there is ample spare capacity in the economy, but we had thought he would be the only one.” Economists now widely expect interest rates to be held at 5 per cent for some months after last week’s Inflation Report suggested that the inflation target was likely to be hit at this rate of interest.
In the minutes, arguments for keeping rates on hold included a slack labour market and the view that inflation was being stoked by high energy prices and would fall back when these dissipated.
As widely expected, the minutes also suggested that forthcoming wage settlements will play a key role in the future course of interest rates.
Mr Archer said: “Given that many wage agreements are still linked to RPI inflation, and this reached an eight-year high of 3.7 per cent in October and could well reach 4 per cent by the end of the year, there is a clear risk that the early 2007 pay settlements could be significantly higher.
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“If wages do show signs of moving up markedly, the Bank of England is highly likely to react by pushing up interest rates further.”
15 months
Longest period in modern times of base-rate stability. From November 2001 to February 2003 it was fixed at 4 per cent
Source: Bank of England