Bank of England divided on inflation outlook

By ROBERT BARR Associated Press Writer

LONDON (AP) - Members of the Bank of England's rate-setting panel are increasingly concerned about inflation but uncertain how a new government, a euro debt crisis and other developments will affect consumer prices, according to minutes of the meeting released Wednesday.

The Bank's Monetary Policy Committee, which is responsible for adjusting interest rates to keep inflation at or near 2 percent, voted unanimously to leave the base interest rate at an all-time low of 0.5 percent.

Official data released Tuesday put consumer price inflation at 3.7 percent in April, a 17-month high.

The minutes revealed a division between members who believe spare production capacity was dampening inflation less than previously assumed, and those who were more worried about credit constraints and the Greek crisis.

"We are surprised that the MPC is so relaxed about the medium-term inflation outlook, and that although there are differences in view across the Committee there have been no signs of major dissent," said Simon Hayes at Barclays Capital.

"We do not share the MPC's confidence that the medium term outlook is for inflation to slump persistently below target. Nevertheless, the MPC's recent communication has made it clear that it believes the current ultra-loose policy stance is appropriate, and a near-term tightening in policy appears unlikely," Hayes added.

Bank of England Governor Mervyn King has recently been stressing the economy's uncertain outlook, though the Bank still expects inflation to fall back below target next year.

"The pace and extent of the prospective fall in inflation are highly uncertain," King said in a letter on Monday to Treasury chief George Osborne, explaining why inflation exceeded the official target.

According to the minutes, MPC members agreed that although "risks to activity and inflation in the near term had increased, it was too early to assess with confidence the overall impact of recent developments on the medium-term outlook."

"Some members interpreted recent developments in firms' costs and pricing behavior as potentially suggesting that the dampening effect on inflation from the margin of spare capacity might be somewhat weaker than assumed in the May central projection," the minutes said.

"Others placed more weight on the downside risks to activity and inflation from continued constraints on credit supply and recent developments in the euro area."

The latest Monetary Policy Committee meeting began a day after the national election which produced a coalition government led by Prime Minister David Cameron, and MPC members were waiting to see what the government intends to do to reduce a record deficit.

The likelihood that the new government's plans would be more drastic than those set out by the previous government "created further uncertainty about the prospects for activity and inflation," the minutes said.

"The MPC remains firmly in wait and see mode," said Jonathan Loynes, economist at Capital Economics.

"But with the economic recovery still fragile, the upward pressure on inflation set to fade and a huge fiscal squeeze looming, we still think that a further loosening of monetary policy is more likely than a tightening over the next year," Loynes said.