Outlook: Eddie George sprouts wings: now why's that?

"Confused? We are". That was the conclusion of one City circular analysing the Inflation Report yesterday. The MPC has left interest rates unchanged for the past two months, while the constant drip of statistics and surveys has made it pretty plain that the economy is starting to cool off. There are uncertainties - mainly about pressures in the jobs market - but most Bank-watchers had concluded that interest rates were now as high as they were going to get this business cycle.

Here is the puzzle. Yesterday's report announced that rates will probably have to climb further because inflation is likely to be above target in two years' time, the Bank's policy horizon. What's more the vote at January's MPC meeting, and presumably February's, was split - but the split was five to three in favour of no change rather than an increase.

There is a puzzle within the puzzle too. The four-strong Bank team on the committee was on the side of the doves, quite the reverse of what everybody would have expected. Mervyn King, the human face of the Inflation Report, provided a partial explanation of these conundrums. As he pointed out, the decision genuinely is finely balanced and reasonable people - like the MPC's members - can be expected to disagree. The minutes of January's MPC meeting make it clear that there were actually more than two views, with some members holding to more than one view. One argument was that disappointing inflation figures and growing pay pressures warranted an immediate rate rise. Another was that weaker demand at home and the impact of Asia meant a move was unjustified.

In between was the view that there was so much uncertainty about which set of risks was greater that there was no option but to wait and see. In a yes-no vote, the wait-and-see camp (presumably the four internal Bank members) cannot be distinguished from the no-change camp (DeAnne Julius).

As to whether it was consistent to not raise rates while simultaneously predicting inflation would probably miss its target in future, Mr King said yes, because of the degree of uncertainty. There was too great a danger of having to reverse an early rate increase. All convincing stuff but it is hard to avoid the suspicion that there was some Bank realpolitik involved as well, with Eddie George and the rest of the Bank team unexpectedly sprouting wings to perch beside the well-known dove on the Committee, Ms Julius. Mr George does, after all, still have a second term of office to win. But no. Surely not!

If a bit of inconsistency is the price of transparency in the new monetary arrangements, it is a price worth paying.