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MPC member calling for rate cut
The Monetary Policy Committee (MPC) consists of
nine members who meet every month in order to decide on what level
the base rate of interest should be set at. Stephen Nickell is
one of these nine people, and in the last two meetings of the
MPC he has been alone in voting for a reduction in rates from
4.5 to 4.25% - a suggestion that was not supported by the other
members.
The reasons why Nickell has been calling for a cut in rates are
many, the main ones focus on what he sees as benign inflation
over the coming months. The chancellor has set an inflationary
target for the Consumer Price Index (CPI) of two percent, and
it is this target that the MPC has to try to meet.
While in December the CPI for the year did come inline with this
target, it fell to that level having remained above it since the
July of that year, many believe that this fall is set to continue
and so the target of two percent will be undershot unless a cut
to interest rates is made soon.
There were fears that the increasing cost of oil and energy costs
in general would push high street prices up, and in turn also
increase the CPI, however this doesn’t appear to have happened
– at least not to the levels expected – and with oil
now looking as though it will at least be stabilising if not falling,
these pressures look unlikely to be brought to bear on inflation
over the coming months.
Demand from consumers for goods and services is another factor
that can push up inflation, however the UK economy looks likely
to remain steady and not see the big increases in spending needed
to push up inflation.
Looking at these kinds of predictions it’s hard to see
why the MPC would decide to keep rates on hold, well there are
certain influences which could cause an inflationary rise in the
near term, notably the beginning of the year is traditionally
accompanied by a round of wage increases as people renegotiate
their contracts or move jobs, and this could well result in increased
consumer spending. As well as this there are concerns that rises
in wholesale gas prices could force energy costs up, again this
would impact the inflation figure.
If these possibilities do happen, the effect on inflation would
likely be short-term, as was the case with the oil price increases.
There are many who believe that a cut in interest rates is due,
if not already overdue, and the MPC meetings in the coming months
are certainly going to be interesting.
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