Jeremy Warner's Outlook: Rates dilemma just keeps on getting worse

Oh to have been a fly on the wall for yesterday's interest rate decision, unremarkable on the face of it with the bank rate held at 5 per cent, but beneath the surface a mass of seething disagreement as members of the Monetary Policy Committee try to come to terms with the push-me-pull-you of surging inflation and plummeting growth.

We know from the minutes that the MPC has been split three ways for at least two months now. Last month, these splits fully broke cover, with one member voting for a rise even as another voted for a cut. Something similar can reasonably be assumed to have happened at yesterday's meeting, with the recent data giving every cause for alarm on both inflation and growth. Next week's Inflation Report will show a sharp deterioration in the short to medium-term outlook for both inflation and growth.

According to a British Retail Consortium survey, food price inflation is running at 9.5 per cent and we've also just had a 35 per cent increase in gas prices. Meanwhile, both growth and house prices are slumping. It will be a minor miracle if the economy grows at all in the third quarter, while according to the latest Halifax index, house prices are now 8.8 per cent lower than a year ago.

The Chancellor's incompetence in hinting at stamp duty relief threatens to cause the already stalled market in housing transactions to grind to a complete standstill. Even if you can get a mortgage, you are unlikely to buy now if, by waiting until the autumn, you can avoid stamp duty.

The Bank of England badly needs to start cutting interest rates if it is to avoid a nasty recession, yet it is equally determined to stop the present spike in inflation becoming embedded in the economy through second-round effects. CPI inflation may hit 5 per cent before it peaks, but an eventually falling trajectory ought to give the MPC the confidence to start cutting rates by the end of the year, absent of inflation-busting wage settlements becoming the norm.

Rents are already falling in many parts of the country, so for some, relief is on the way. Harder to gauge is what effect falling house prices might have on consumption. Stan-dard & Poor's, the credit rating agency, recently estimated that a 17 per cent fall peak to trough in house prices would put 1.7 million in negative equity. A 30 per cent fall would boost that number to 3 million. When they feel less wealthy, people hunker down and spend less, particularly if they start fearing for their jobs. So the Bank needs to act soon, despite still rising inflation. How long dare it hold off?