The Bank of England's Monetary Policy Committee (MPC) has talked much of late of the 'balancing act' that it is performing to offset inflationary pressures against threats to economic growth. The Tiffin Girls' School, the winner of the national final of the Target Two Point Zero Interest Rate Challenge, went one step further, however, calling it a “tug of war” and “one of the hardest interest-rate decisions since the Bank of England gained independence”.

The difficulties facing the MPC in today's economic climate were also highlighted by some of the other teams in the national final. The team from Loreto College, runners-up in the competition, asked: “Who would be a central banker now?”

More than 275 schools entered the competition, which is run by the Bank of England in conjunction with The Times. The challenge is to play the role of the MPC, taking into consideration the present economic conditions, to set interest rates so that inflation meets its 2.0 per cent target.

Over the course of regional and area heats, the teams were whittled down to only six, who attended the finals in the Bank of England's headquarters in London on Friday.

Five of these teams voted to keep rates on hold at 5.25 per cent, while Tonbridge School voted for a quarter-point cut.

The schools each gave a 20-minute presentation to support their rate decision and then faced a 15-minute grilling from the judging panel, which was made up of Rachel Lomax, the Bank's deputy governor for monetary policy and a member of the MPC; Charles Bean, the Bank's executive director, chief economist and a member of the MPC; Andrew Sentance, an MPC member; and Anatole Kaletsky, chief economic commentator and associate editor of The Times. Jean-Claude Trichet, President of the European Central Bank, also sat in for part of the day. Speaking to the students, he said: “This idea of having a challenge between schools with a very impressive prize looks like a very good idea.”

Spiralling commodity prices, rising inflation expectations, the weakening pound, falling house prices, the slowdown in the United States and the credit crunch were among the main factors concerning most of the teams.

Teresa Song, the dove on The Tiffin Girls' School team, argued that the inflationary pressures affecting the UK were short-term concerns, while the downside risks, including the ramifications of a slowdown in the United States, were medium-term risks that could push inflation below the target. She told the judges: “The UK has too much of a tendency to adopt a wait-and-see approach.”

Her team-mates outvoted her, arguing that some inflationary risks were of concern in the short and medium term. They added that opting to cut rates “would send out the completely wrong signal to the market”.

Loreto College said that a rate cut might be justified as the global economy faced “its biggest test in more than a decade” and it was unlikely that the UK would “emerge unscathed”. Yet the team argued that this was outweighed by the need to hold rates as the ramifications of the credit crunch, increasing cost pressures, falling house prices and the decline in easy credit became clear. In a timely comment, they said: “Worries remain about the skeletons that may be in the closets of financial institutions in the wake of the credit crunch.”

Ms Lomax, who chaired the judging panel, told the teams when she announced the winners: “Right through the regional heats, the area finals and especially today in the national final, the quality of the performances has been extraordinarily high. "You all have an impressive grasp of the key economic issues facing the MPC and you have presented the material in fresh and innovative ways and with great enthusiasm.”

After handing out the prizes of £10,000 for the winning school, £5,000 for the runners-up and £2,000 for third place, with other teams in the final receiving £1,000 for their school, Mervyn King, the Bank's Governor, said: “We believe it is the application of economic analysis that has produced the years of stability which means that you don't remember high inflation - although it may be that we can give you a banking crisis or two to give you something to think about!”

Flair for economics

1st: The Tiffin Girls' School, Kingston-upon-Thames.

Nancy Chen, Georgia O'Donnell, Neshma Shah, Teresa Song

2nd: Loreto College, Coleraine,

Co Londonderry

3rd: Leeds Grammar School, West Yorkshire

Other finallists: Peter Symonds College, Winchester, Hampshire; Tonbridge School, Tonbridge, Kent; Wolverhampton Girls' High School, Wolverhampton

Explore Economics

• Autumn Budget 2007

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• BA chief waives bonus after T5 fiasco
• Prospects of cheaper loans hit as Libor soars
• Rice price dives as US and Japan set to unlock grain pact