Hope of peak in inflation sets Bank a rates puzzle

DIVISION at the Bank of England threatens to cause the first ever fourway split on its interest rate-setting committee this week, as policymakers grow increasingly divided on how to address Britain’s economic challenges.

Markets are betting on the Bank’s Monetary Policy Committee (MPC) voting for a 0.5 percentage point rise on Thursday, slowing from the 0.75 percentage point hike at its last meeting.

However, the pivot to a slower pace of tightening is expected to stoke division. City economists predicted it could result in the first four-way split since the Bank gained independence in 1997 as they balance the threat of inflation against the UK’S plunge into recession.

Analysts think one member of the seven person MPC could vote to hold interest rates at their current level of 3pc, one is likely to vote for a smaller rate rise of 0.25 percentage points, while up to three members of the committee could back a more aggressive 0.75 percentage point increase.

The division comes against a backdrop of industrial unrest, high inflation, an ultra-tight jobs market and recession. The unusual combination means policymaking is more difficult.

Jpmorgan economist Allan Monks warned that a four-way split would “muddle the Bank of England’s message on rates”. He said: “If the economy is in a recession, it is far from clear that it is set to produce enough weakness to bring inflation sustainably back down to the target.”

Forecasters said the strikes gripping Britain threaten to deepen the downturn and stoke inflation, causing more headaches for the Bank’s rate-setters. Rail staff, postal workers and nurses are all staging walkouts this week.

Paul Dales, chief UK economist at Capital Economics, said that the industrial action would have a direct impact on sectors that generate 18pc of UK GDP. However, only around 3pc of the economy’s output is at risk from the strikes and the overall hit to GDP is set to be “fairly small”, at between 0-0.5pc.

“Any hit to GDP is not helpful when the economy is probably already in recession,” said Mr Dales.

“The strikes may contribute to wage growth being stronger than otherwise, which may mean that inflation is higher than otherwise and interest rates need to be higher than otherwise for longer.”

The hospitality and travel industries are expected to be hardest hit by growing industrial action that will further dampen economic activity. The Centre for Economics and Business Research (CEBR) estimates that the rail strikes will cause a near £500m hit to GDP by the end of January.