Base Rate Uncertainty May Drag On

The time between the announcement of the monthly decision by the Bank of England's rate-setting monetary policy committee (MPC) and the publication of the minutes is frequently filled with speculation about how the committee might have voted. Partly this may be due to the fact that nature abhors a vacuum, but when there is widespread expectation of forthcoming changes in rates the significance of the discussion increases.

Such a situation was certainly the case during this month's hiatus. Between the announcement of the decision on November 8th and the release of the minutes today, the November inflation report was published, indicating that interest rate cuts would soon be on the way as inflation was expected to hit its target in the long-term even if the present 5.75 per cent level was trimmed.

With commentators speculating about two or even three cuts in the next year, the question was no longer one of if but one of when. Thus the voting figures and reasoning contained in the minutes took on a particular significance. A clear vote to hold would suggest the next cut was some way off. A close vote would be interpreted as a sign that a change was imminent.

Following all the speculation, the minutes indicated a vote cast seven to two in favour of the status quo, with John Gieve joining October's odd man out David Blanchflower in arguing that, as the minutes put it: "Waiting for further evidence before cutting interest rates towards a more neutral level risked making the slowdown sharper and longer than it needed to be to bring inflation back to target." However, the majority were concerned at the potential inflationary effects of oil and food prices, while believing that there was still time to wait for more data to emerge.

The interpretation of these figures and the minutes has varied, giving no clear signal to those with variable-rate mortgages about what may happen to their repayments, or those hoping for a cut to boost the flagging housing market.

Martin Slaney, an analyst at GFT Global Markets, said as much when he told the BBC: "The minutes do little to dispel uncertainty over the timing of when a rate cut will come," But he added his own prediction that rates "will be kept on hold for a few more months" rather than being cut before the year is out.

This differed from the view of Ian Kernoghan, an economist with Royal London Asset Management, who suggested an early Christmas present was not unlikely. He said: "Last week's Inflation Report opened the door for a rate cut at some point and the latest set of MPC Minutes raises the prospect that this will come as early as next month."

Earlier this year, many economists were tipping rates to rise higher than 5.75 per cent. Since the credit crunch struck such predictions were replaced by the expectation that the next move would be down. The November Inflation report put some flesh on those bones, but given the divergent analysis of the experts, the issue of the timing of the first cut may be no clearer at all today than it was yesterday.

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