For some members, the increase in inflation had been sufficient to consider whether an immediate rise in Bank Rate was warranted. “If there were a serious threat to medium-term inflation expectations then a preemptive rise in rates would be appropriate,” According to the minutes. “Delay would only increase the eventual costs of bringing inflation back to target.”
However, there were a number of arguments against. A range of nominal indicators suggested that medium-term inflation expectations remained anchored, so a rise in Bank Rate was not required urgently to stabilise inflation expectations.
According to the minutes from the meeting, the Governor invited the Committee to vote on the proposition that Bank Rate should be maintained at 5%. Eight members of the Committee (the Governor, Rachel Lomax, John Gieve, Kate Barker, Charles Bean, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the proposition. David Blanchflower voted against, preferring a reduction of 25%.
The Committee concluded that the immediate outlook for short-term inflation had worsened and that it is likely that inflation will rise to a peak well above its current level later in 2008. “But the factors behind the increase should be temporary,” it believed, and it remained “most likely that, even if the oil price stayed at its current high level, the inflation rate would, at some point over the next year or so, move back towards the 2% target”.
The Committee considered a range of broad indicators of medium-term inflation expectations. “Some comfort could be taken from the relative stability of nominal forward interest rates from five to ten years ahead,” the minutes said. “If markets had expected that inflation would persist at high levels, then these rates would most probably have risen.”
Overall, the Committee judged that the downside risks to the inflation outlook in the medium term, arising from the prospective slowdown in growth, were little changed, although there remained a range of views about the extent of those risks.
