30 For a majority of members there was already sufficient evidence to justify an increase in Bank
Rate and no compelling reason to delay. The world economy was robust, nominal domestic demand
was growing strongly and real output growing at least at its potential rate. Spare capacity had
diminished and inflation had been rising as it had become easier to increase prices. For these members
there was a significant risk that inflation would not fall back as quickly as the Committee had expected
in its central case in the November Inflation Report and little risk that an increase in interest rates
would cause an unnecessarily sharp slowdown in activity. There was a risk that the 50 basis points
rise in Bank Rate since August might not be sufficient to keep demand and inflation expectations in
check and an early increase in rates might prevent larger increases later. For some of these members,
the fast pace of money and credit growth and buoyant asset prices gave additional concerns about
upside pressures to inflation.
31 For other members, there was insufficient news to warrant an immediate increase in Bank Rate.
Although the upside risks had increased, the most likely prospect was that inflation would fall back
later this year. The Committee should not be interpreted as reacting to short-term volatility in CPI
inflation. It was difficult to know how informative the current inflation rate was, given sharp
movements in volatile components such as energy and food. The Committee had already raised rates
by 50 basis points since the summer. If new data made it clear that it was necessary to increase Bank
Rate further then it would help to have the Inflation Report to explain why in the context of the
medium-term prospect. In the meantime, the recent increase in CPI inflation would add to the risks in
the current wage round, and so it was important to communicate clearly that the Committee would act
8
if pay accelerated or inflation expectations were threatened. But an increase in Bank Rate this month
ran the risk of prompting an excessive monetary tightening by shifting up market interest rates.
32 The Governor invited the Committee to vote on the proposition that Bank Rate should be
increased by 25 basis points to 5.25%. Five members of the Committee (the Governor, John Gieve,
Kate Barker, Tim Besley and Andrew Sentance) voted in favour of the proposition. Rachel Lomax,
Charlie Bean, David Blanchflower and Paul Tucker voted against, preferring to maintain Bank Rate
at 5.0%.
33 The following members of the Committee were present:
Mervyn King, Governor
Rachel Lomax, Deputy Governor responsible for monetary policy
John Gieve, Deputy Governor responsible for financial stability
Kate Barker
Charles Bean
Tim Besley
David Blanchflower
Andrew Sentance
Paul Tucker
Jon Cunliffe was present as the Treasury representative.