Oil price a headache for BoE
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By Ross Finley and Fiona Shaikh
LONDON (Reuters) - High oil prices are creating a dilemma for Bank of England policymakers as they try to balance the competing demands of lower growth and higher inflation.
Two months after the central bank's Monetary Policy Committee was split 5-4 on its decision to cut interest rates to 4.5 percent, more divisions appear to be surfacing about how to handle steep energy costs.
New member David Walton, who had backed the August cut, told parliament's Treasury Select Committee on Thursday there were downside risks to the BoE's growth and inflation forecasts.
"A further period of subdued consumption growth seems quite likely," he said. "When the oil price goes up, basically it's tax. Inevitably, households will suffer some fall in their living standards."
But fellow MPC member Paul Tucker, who opposed cutting rates in August, gave no hint that he was itching to ease monetary policy, arguing that at 4.5 percent interest rates were probably "broadly neutral to slightly accommodative."
Talking to the same parliamentary committee, Tucker seemed more worried that high oil prices would force people into demanding more pay.
"There's just a little bit too much risk that people might say 'I want compensation for that, inflation is turning high, it's eating into my spending power and I am going into the next wage bargaining round and want compensation for that," he said.
MARKETS SELL-OFF
Interest rate futures sold off during the testimony, extending losses made this week after BoE Governor Mervyn King dampened market expectations of further rate cuts by saying central banks could not target every fluctuation in output.
Tucker took much the same line as his boss. Monetary policy cannot fine-tune the economy, he said, though he noted that pre-cautionary rate cuts could be justified in some circumstances.
But economists said November's rate decision still remained a very close call as MPC members like Walton might choose to call for rate cuts again, raising the prospect of the Governor being outvoted for a second time.
"(Today) provides insight into two strands of thought within the MPC, with more dovish members stressing the slowdown in activity, and more hawkish members highlighting the uncertainty around inflation," said Michael Hume of Lehman Brothers.
"The minutes from the October meeting, released next week, should reveal a unanimous vote. The November meeting remains set to be a lot closer: we are sticking by our forecast of a 25 basis point cut."
By Ross Finley and Fiona Shaikh
LONDON (Reuters) - High oil prices are creating a dilemma for Bank of England policymakers as they try to balance the competing demands of lower growth and higher inflation.
Two months after the central bank's Monetary Policy Committee was split 5-4 on its decision to cut interest rates to 4.5 percent, more divisions appear to be surfacing about how to handle steep energy costs.
New member David Walton, who had backed the August cut, told parliament's Treasury Select Committee on Thursday there were downside risks to the BoE's growth and inflation forecasts.
"A further period of subdued consumption growth seems quite likely," he said. "When the oil price goes up, basically it's tax. Inevitably, households will suffer some fall in their living standards."
But fellow MPC member Paul Tucker, who opposed cutting rates in August, gave no hint that he was itching to ease monetary policy, arguing that at 4.5 percent interest rates were probably "broadly neutral to slightly accommodative."
Talking to the same parliamentary committee, Tucker seemed more worried that high oil prices would force people into demanding more pay.
"There's just a little bit too much risk that people might say 'I want compensation for that, inflation is turning high, it's eating into my spending power and I am going into the next wage bargaining round and want compensation for that," he said.
MARKETS SELL-OFF
Interest rate futures sold off during the testimony, extending losses made this week after BoE Governor Mervyn King dampened market expectations of further rate cuts by saying central banks could not target every fluctuation in output.
Tucker took much the same line as his boss. Monetary policy cannot fine-tune the economy, he said, though he noted that pre-cautionary rate cuts could be justified in some circumstances.
But economists said November's rate decision still remained a very close call as MPC members like Walton might choose to call for rate cuts again, raising the prospect of the Governor being outvoted for a second time.
"(Today) provides insight into two strands of thought within the MPC, with more dovish members stressing the slowdown in activity, and more hawkish members highlighting the uncertainty around inflation," said Michael Hume of Lehman Brothers.
"The minutes from the October meeting, released next week, should reveal a unanimous vote. The November meeting remains set to be a lot closer: we are sticking by our forecast of a 25 basis point cut."
posted by Marcel at 7:55 AM
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