Speculation Rises Over BoE Interest Rate Decision

Posted by: Mark Scott on August 19

Britain often is accused of being obsessed with celebrities. Yet as the economy slides further towards recession, an unlikely group has taken center stage, garnering media attention that’s usually reserved for the latest reality TV winner or up-and-coming pop star. And who are these people currently the talk of the town? Why, it’s the Bank of England’s Monetary Policy Committee (MPC) — the nine-member board that sets the country’s interest rates.

Bank of England (BoE) Governor Mervyn King and the rest of the committee again will be headline news on Aug. 20 when the minutes from their Aug. 7 decision to maintain rates at 5% will be released. Last time, the nine-member MPC was split 7-1-1 to keep rates where they are, with one member calling for an interest hike and another preferring a cut. A similar division is expected this time around. (UPDATE - the committee indeed again split 7-1-1)

Writing in the British tabloid newspaper The Sun, MPC member Tim Besley (who voted for a rate hike in July) said the BoE's central mission was to keep spiraling domestic costs under control. Latest figures put Britain’s inflation at 4.4% -- well above the BoE’s 2% target. "Our job is to fight inflation because that's the best basis for the economy to grow, create jobs and allow living standards to rise," Besley says.

That's all well and good, but economists expect the BoE finally will cave to pressure for a rate cut by the early part of 2009. Declining commodity prices could well put a lid on inflation, while annual British GDP growth (as well as that of the rest of the European Union, for that matter) is expected to fall to 1.5% in 2008 and a mere 1.0% next year. That's down from a 3.1% rise in 2007. If the country's economy continues to struggle, the need to energize British business soon may outweigh the BoE's concerns over inflation.

In this context, the Aug. 20 release of the MPC’s interest rate deliberations once again will be a hot topic for people across Britain. They may not sing or dance, but fears surrounding the country's short- to mid-term economic future have made King and the other committee members Britain's most unlikely celebrities.