Inflation limits MPC's action

Economists were taken by surprise this week when the Bank of England's Monetary Policy Committee failed to agree on whether interest rates should be further cut this month.

Minutes of the yesterday's MPC's meeting came to light showing that, although all members of the committee believe rates should fall further, inflation worries prevent some from supporting a premature rate cut.

"There is a big difference between what is happening in the housing market and the broader economy," said Ted Scott, manager of the F&C UK Growth & Income Fund. "In the US there have been much more aggressive in terms of cutting rates, but the MPC has to take into account its inflation target and this is a major concern. Moreover, the official rate of inflation understates the 'real' rate of inflation. Things like energy and food are going up enormously in price so for the average householder the real rate of inflation is well above 2.5% and possibly as high as 7 to 8% range. The MPC is obviously well aware of this and will continue to be reluctant to cut rates too much."

According to Scott, it is becoming increasingly evident that the economy is slowing down more rapidly than expected. If we are to avert recession, the MPC will have to be more proactive in their policy. "It's true they have taken other measures like this week's £50bn liquidity injection. This might help but it's far from been sufficient if you take into account the size of the UK mortgage sector. Also, the success of measures like this, depends on how banks react to it and whether they will be actually lending more money, or passing any rate cuts onto customers - something which many are planning to do in the foreseeable future."

Scott believes more aggressive policy is needed to boost the economy but admitted "inflation is keeping MPC's hands tied up".