Rate rises and who controls Britain’s currency policy?

Now we know what happened last Wednesday.

Mervyn King did seem a little tetchy in that Inflation Report press conference with the odd jibe aimed at his interogators, including me.

The benefit of hindsight reveals he was doing a Mourinho: lashing out at the external press conference in order to deflect attention from his unprecedented splits on his team.

Wednesday morning’s minutes reveal an unprecedented four way split. Mervyn King was addressing us knowing he had an arm tied behind his back. There is a fundamental technical and intellectual split on the 9 member interest rate-deciding committee. It backs up my post last week “5 reasons for Merve’s Swerve”.

These are almost irreconcilale differences, outlined by competing speeches from MPC members Andrew Sentance and Andrew Posen that could come from different economic solar systems, let alone planets. Today we learn that Sentance wanted a 0.5 per cent rise. Posen wants to print more money. Two others, Weale and Dale, also want a rise. And the rest, including Mervyn are on hold.

Spencer Dale’s conversion is key. He is a bank insider, its chief economist, responsible for putting together the inflation report. He is the first insider since July 2007 to vote for a rise in interest rates. As we now have 3 members voting for a rise, there’s a strong chance of a rise next month. As I said last week I think waiting for the GDP figures for Q1 would be rational, just to ensure that we aren’t actually in a recession. By May it’s a certainty.

And this raises very real questions about the pound. As Andrew Sentance pointed out in his speech last Thursday, it is not true to say that the MPC can do nothing about these externally generated sources of inflation, such as today’s Brent crude oil price reaching $111. The exchange rate is a key input into domestic price levels, and the weak pound has pushed up prices in Britain, making us all feel poorer. So raising rates, targeting a stronger pound, would help, among other things, in keeping inflation at its 2 per cent target. That is the Sentance argument.

Yet, listen back to George Osborne‘s interview with Krishnan on Saturday. Hear his praise of the weak exchange rate, and its role in boosting manufacturing and helping to “rebalance Britain”. The Governor says the same thing. A weak pound is funadamental to the economic strategy of this Coalition. But is it consistent with the inflation target of 2 per cent? These are considerations that we thought that British economic policy had left behind.

Now that Britain’s is importing inflation rather than deflationary pressures from the rise of China et al, it matters again.