Bank set for rate cut next month
Thursday 22 October 1998
Two members of the Bank of England's nine-strong committee - Willem Buiter and DeAnne Julius - had wanted to cut interest rates by at least 0.5 percentage points, warning that the chances of recession in the UK next year "had substantially increased".
The other seven MPC members voted to reduce rates by 0.25 points, show the minutes of October's rate-setting meeting, published yesterday.
Paul Mortimer-Lee at Paribas said: "I strongly expect a cut in November. Don't rule out 0.5 percentage points."
Geoffrey Dicks of Greenwich NatWest agreed, saying that a November rate cut was a "done deal", the only question being whether the MPC would go for a 0.25 or a 0.5-point cut.
The committee is now thought likely to wait until its November meeting before cutting rates again. Eddie George, Bank governor, speaking at a private lunch in London, is understood to have ruled out an emergency MPC meeting.
The October minutes reveal MPC concerns about the reliability of official statistics, particularly average earnings data, which have been revised twice in recent weeks. These concerns were underscored by Mervyn King, the deputy Bank governor, in a speech yesterday to the National Council Of Building Material Producers.
Mr King said: "It is now extremely difficult to know how to interpret any aspect of the earnings data. I can promise you that the Bank, the Treasury and the Office for National Statistics will, as a matter of urgency, work together to try to understand what is happening."
The minutes indicate that the MPC is becoming increasingly concerned about a UK credit crunch, with Professor Buiter and Ms Julius warning of "tentative reports that domestic credit conditions were tightening".
The committee noted: "Spreads [between the yield on corporate bonds and gilts] were well above the level of a year ago, reflecting either an increased aversion to risk or a perception of greater risks."
The MPC has asked the Bank's regional agents to conduct a survey of borrowing conditions in time for its next meeting in November. An informal survey of regional agents before October's rate meeting revealed slowing economic activity, below-trend growth in the services sector and plummeting confidence.
The minutes reveal the MPC was split into four camps:
Professor Buiter and Ms Julius - in the "large cut" camp - argued that a 0.25-point cut would not prevent a substantial rise in unemployment;
A second camp, likely to include Charles Goodhart, according to City analysts, reluctantly agreed to the cut amid worries that failure to act could damage market sentiment;
A third block of committee members - possibly including Mr King - argued that clear evidence of a credit crunch would necessitate a larger rate cut, but cautioned that recent falls in sterling would boost activity;
A fourth contingent, thought to include Mr George, agreed that a larger cut might be needed but preferred to wait until next month's inflation report had been finalised.
Separately, the Office for National Statistics said retail sales were 0.4 per cent lower in September on August, broadly in line with expectations. The annual growth rate was 3.7 per cent, slightly weaker than expected due to revisions of data.
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