MPC split raises hopes of fresh rate cut

HOPES OF a cut in interest rates were boosted yesterday after it emerged that the Bank of England had split by the tightest of margins at its last monetary policy meeting.

Four of the nine members of the Bank's Monetary Policy Committee (MPC) voted to cut rates from 5.25 per cent, according to the minutes of the 6 May meeting. The other five voted for no change. But forecasts for the next rates move were thrown into confusion by unemployment statistics that pointed to a tightening labour market.

The minutes of the MPC surprised the City, which had expected unanimity on monetary policy. They revealed that most members believed the arguments were "finely balanced" between no change and a small cut and that the decision was "partly a matter of tactics". They confirmed that the MPC had split over the impact of the strength of sterling on the economy.

The Bank's Deputy Governor, David Clementi, executive director Ian Plenderleith, and independent members DeAnne Julius and Willem Buiter backed a further 0.25 per cent reduction in base rates. They argued that there were grounds for expecting sterling to remain strong and that on balance the risks to inflation were on the downside.

It also emerged that some members had argued for an intervention on the foreign exchange markets along with a statement linking a rate cut with the strength of the pound.

The Governor, Eddie George, his deputy Mervyn King, the chief economist John Vickers and independents Charles Goodhart and Alan Budd voted to leave them on hold. The majority argued there were dangers in moving rates to keep up with exchange rates, and said that any rate cut would be short- lived once sterling had fallen back in line with the Bank's projections.

Meanwhile, the number of people in work surged to an all-time high while the jobless total tumbled to a 19-year low, according to figures published yesterday. The number of people out of work fell by 17,400 in April, taking the unemployment rate to 4.5 per cent, its lowest since April 1980. The City had expected an increase of 6,300 and the unexpected fall raised fears that an interest rate rise could be on the cards in the medium term.

The cut in the jobless was matched by an increase of people moving into the labour market. Employment rose to 27.35 million, an increase of 328,000 from a year ago.

Average earnings growth for March accelerated ahead of expectations, rising by 4.8 per cent against a forecast of 4.7 per cent and 4.6 per cent in February. In the private sector wage rises are running at 5 per cent, or three times the rate of inflation.

Geoffrey Dicks, of Greenwich NatWest, said the MPC's rate decision in June would be "finely balanced". "The battleground going forward is the strength of sterling on the one hand and the tightness of the labour market on the other," he said.

The outlook for the public finances looked healthy after Public Sector Cash requirement figures showed the Government paid off pounds 1.6bn of debt last month. The public finances were boosted by higher receipts from corporation tax, income tax and national insurance contributions.

Outlook, page 21

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