Inflation hawks tamed in interest rates debate

Economists are not know for being sentimental. But is it possible that the members of the Bank of England's monetary policy committee (MPC) left interest rates unchanged today because they didn't want to spoil the chancellor's wedding celebrations?

If they had put up rates today, Gordon Brown would surely have got the blame. Many commentators were predicting that borrowing costs would have to rise to offset the inflationary pressures generated by last month's bumper boost to public spending.

The influential National Institute for Economic and Social Research has predicted that rates will need to go up by 0.5 percentage points to offset the impact of Mr Brown's spending increase. The MPC noted last at last month's meeting (when it had been given a sneak preview of Mr Brown's plans) that private spending by consumers would need to slow in order to make room for the rise in public spending.

But for the sixth month a row, the Bank has held rates steady, suggesting that it remains relaxed about the impact of Mr Brown's plans on inflation.

The Bank's job is to keep underlying inflation (excluding mortgage interest costs) at 2.5%. Just looking at the current inflation rate suggests that they have the situation well under control - for more than a year they have comfortably undershot this target.

But its task is more exacting: it has to keep inflation on target in two years' time. The reasoning is simple: by the time prices start galloping away, it's too late to tackle the problem.

So the Bank's views about the level of inflation in two years' time are more important than where it is now. All will be revealed in next week's quarterly inflation report when the monetary policy committee updates its forecast.

Last month's minutes revealed a three-way split: the inflation hawks called for an immediate rate-hike, while the doves favoured a cut and the majority opted for no change.

Next week's inflation report will give us a better idea of whether the doves or hawks are winning the argument.