MPC postpone tackling rising inflation amidst renewed weakness

As expected, the Bank of England left interest rates unchanged at its monthly policy meeting today but it was a less straightforward call than usual.

The debate as to whether the Bank should raise rates has become increasingly heated and in January's meeting a second member of the MPC joined the long standing hawk, Andrew Sentance, in calling for a rise.

Ted Scott, Director, Global Strategy at F&C believes the dilemma for the MPC now is that inflation has risen to well above the official target of 2% while the economy is showing signs of renewed weakness (GDP growth was -0.5% in the final quarter of 2010).

"The Governor, Mervyn King, has warned that inflation could rise as high as 5% this year. Unlike other economies experiencing high headline inflation, the core rate (excluding food and energy) has also risen sharply so it is not fair for the committee to blame commodity prices." Scott commented.

Nevertheless, a rate hike could stall the economy further at a time when the austerity measures are kicking in, unemployment is high and rising (7.9%) and money supply and credit growth remain weak.

Scott concluded: "While inflation expectations remain anchored at around 3%, the MPC is likely to continue to take heed of the weak economic data. At least, it will want to see how fast the economy grows in the first quarter of this year and then reassess. In the meantime, with inflation likely to climb higher the pressure on the MPC to act will remain high."