BoE's King may not be able to rule MPC

Will the Governor of the Bank of England be outvoted on the direction of British interest rates for a second time in the Monetary Policy Committee's history?

Mervyn King was outvoted in August 2005 when the MPC cut interest rates to 4.5 per cent. While it caused a real stir in the media and markets, BoE officials say it actually enhanced the Committee's credibility.

His speech last week certainly raised the possibility that he either already has, or will, vote for a hike in borrowing costs because of worries about higher inflation.

"A change in oil prices does not in itself tell us where overall inflation is headed in the medium term. For that, we need to look at the balance between money spending and potential supply," he told a southern England business audience.

And while there was a lot of uncertainty about the economy's potential, he said that domestic demand had picked up and the money supply was rising at its fastest rate since 1990.

Economists said Governor King still looked to be gunning for a repeat of August's quarter-point hike and many still predict borrowing costs will climb to five per cent at the November meeting after being held at 4.75 per cent earlier this month. The minutes of the October meeting are published tomorrow.

But not everyone on the MPC necessarily shares Governor King's views. David Blanchflower has already made his views known, opposing the surprise August decision because of concerns about the health of the global economy and a slackening labour market.

For him, the issue looks to be more about whether or not the BoE should cut interest rates to 4.5 per cent, not raise them again.

BoE deputy governor John Gieve, meanwhile, has on one hand, said that wage-setters need a strong signal that inflation will be kept under control but has also raised concern that the US housing market may be turning down.

Governor King himself opened the door to possible disagreement on the MPC during last week's speech referring to how difficult it was to interpret economic data whether one had been on the committee for a long while like him or had recently joined.

"It is highly appropriate that I have been talking this evening about the recent decisions of the Monetary Policy Committee in the shadow of King Arthur's Round Table," he said.

Like the knights of legend, King said there was no MPC head. Decisions were also determined by majority, not consensus.

"That may suggest the November move is not a foregone conclusion as the financial markets suggest and that currently there are some differences in opinion on the Committee," said John Butler, UK economist at HSBC. "Perhaps the minutes to the previous meeting published next week will show a split."

Besides disagreement about the likely spare capacity in the economy in meetings these days, another possible source of contention is the likely place of the money supply in analysing the economy.

Tracking money growth has long been out of fashion but as King's comments show, some policymakers are increasingly worried that the amount of money sloshing around the economy poses a risk to price stability.

"The trend in monetary growth is worryingly high, inflationary pressures may be more generally entrenched than people realise," said Charles Goodhart, a professor at the London School of Economics and former MPC member.