Divisions emerge, but near-term hike unlikely

The Monetary Policy Committee (MPC) is getting increasingly nervous about the current rise in inflation, as evidenced by Andrew Sentance’s vote for an interest rate rise last month. However, most members still seem prepared to wait and see if the spare capacity in the economy starts to pull inflation back down. We doubt that a rate hike is imminent and in fact think that the magnitude of the fiscal squeeze makes a further extension of quantitative easing (QE) likely.