Daily Archives: June 23, 2010

Chris Giles

Yesterday, the Office for Budget Responsibility made it clear that it did not think fiscal tightening would tip the British economy over the edge, partly because “it would be normal to expect some monetary policy response to additional fiscal tightenin.” Some on the MPC think otherwise. Andrew Sentance, an external MPC member, voted to raise interest rates by a quarter of a percentage point. His reason, published in the minutes this morning was as follows:

“For one member, developments over the past month were consistent with a pattern which had been developing over the past year. Inflation had proved resilient in the aftermath of the recession, casting doubt on the future dampening impact of spare capacity on inflation. Demand had recovered at home and abroad, and the average growth of the main measures of UK nominal demand in recent quarters had been above typical pre-recession rates. Despite current uncertainties, for this member, it was appropriate to begin to withdraw gradually some of the exceptional monetary stimulus provided by the easing in policy in late 2008 and 2009.”

If this view gains ground on the Committee, the idea that monetary policy will offset fiscal tightening – if it can – disappears. So far, it seems Mr Sentance does not have much support for his views. 

Investor worries over eurozone banks resurfaced on Tuesday after a warning by a European Central Bank governing council member that some faced funding difficulties.

Sector shares were also hit by concern over a credit downgrade for BNP Paribas and a writedown by Crédit Agricole of the value of its Greek unit. The worries increased the cost of buying protection against bond default in the sector.