MPC meeting: Bank split three ways on interest rate policy

MPC meeting: Bank split three ways on interest rate policy

The prospect of a cut in interest rates to revive the flagging economy was in the balance last night after it was revealed that members of the Bank of England's rate-setting committee were split three ways at their last meeting.

Although seven members of the monetary policy committee (MPC) voted to hold rates, the meeting's minutes showed one member voted for a rise and another for a cut as they wrestled with the dilemma of a slowing economy combined with increasing inflation.

The difficult decision facing the Bank was underlined yesterday when lenders revealed mortgage approvals sank to a new low last month while the CBI said business confidence levels were the worst for five years. The British Bankers' Association (BBA) said lenders granted just 21,118 new mortgages last month, a 67% year-on-year drop and the biggest fall since the series began in September 1997.

The figures will encourage further calls from the City for a cut in interest rates to head off a recession, a cause led on the committee by David Blanchflower who voted for the 10th successive month to cut rates from their current 5%. But Tim Besley, another committee member, voted to raise them, citing concerns about inflation, which was nearly double the Bank's target of 2% last month.

Mervyn King, the Bank's governor, led the other seven members in voting for a hold, creating the first three-way split on the direction of rates since May 2006.

The minutes said the decision.....continued below

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was "a difficult one" for all nine policymakers given that inflation was likely to turn out higher and growth lower than the Bank had thought in May.

"Keeping Bank rate at 5% when the economy was slowing was arguably already sending a strong signal of the MPC's commitment to reducing inflation," the minutes said. "A rate change this month would be a surprise at a time when credit and other financial markets remained fragile, and any change in rates would be better communicated alongside the Bank's August Inflation Report."

That could have been taken by analysts as a sign the committee is minded to resume cutting interest rates next month, but most still expect rates to remain on hold until November at the earliest.

But there was still a discussion about whether rates should be raised, presumably led by Besley.

"Although it could do little to alter the path of inflation in the near term, the committee could, by raising Bank rate this month, send a strong signal that it was focused on inflation and remained determined to bring it back to target in the medium term," the minutes said.

But adding to the argument against a rate rise there had also been negative news on the economy and hence for inflation.

"An increase in Bank rate in the current circumstances, when confidence was low and the financial sector fragile, could impart a downward momentum to the economy that risked a significant undershoot of inflation in the medium term," the minutes said.

James Knightley, economist at ING Financial Markets, thought that rates would remain on hold for the foreseeable future. "It looks as though stable rates are here to stay for several more months," he said. "We doubt that rates will be raised given the weak economic backdrop, as highlighted by a new record low in mortgage approvals today, while the plunge in oil prices are also favourable for a lower inflation outlook."