MPC vote opens way for more interest rate cuts

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HOPES OF a new year cut in UK interest rates were given a boost yesterday after it emerged that the Monetary Policy Committee voted unanimously to reduce rates earlier this month amid concerns about slowing consumer expenditure.

Eight of the MPC members voted to cut rates by 0.5 percentage points to 6.25 per cent, with Willem Buiter, the Dutch academic, again urging the committee to cut by 0.75 points.

The minutes of December's MPC meeting, released yesterday, revealed that members was particularly concerned about slowing consumption, reflected in weak retail sales figures, as well as the rapid build-up of stocks.

The weakening domestic economy, combined with slower growth overseas, meant that "the downside risks had increased since the previous meeting".

Numerous committee members believed further interest rate cuts would be required in the coming months to prop up the weakening UK economy, re-igniting hopes of another cut in rates in early January.

Until yesterday, a January rate cut had been thought unlikely following the release last week of stronger-than-expected figures for November retail sales.

Adam Cole at HSBC Securities said: "In the absence of these minutes, it seemed sensible to believe the MPC would sit on its hands in January. Now it looks like rates could fall again next month."

Hopes of lower interest rates helped the FTSE 100 share index to close up 65.5 points at 5908.8. Sterling ended the day marginally lower against the German mark at DM2.8095.

The minutes - which give the voting records of each committee member and a summary of the arguments - revealed the MPC was split into three camps.

The first, assumed to consist solely of Mr Buiter, believed that an immediate cut more than 0.5 points was justified both by the rapid deterioration of the economy and the low level of rates elsewhere.

The second, thought to include DeAnne Julius, the former chief economist at British Airways, expressed concern that a cut of more than 0.5 points could unnerve themarkets.

The third camp, though to consist of Eddie George, the Bank of England Governor, and most of the Bank staff, thought a 0.5-point cut was appropriate, given the data flow during November.

The minutes also reveal that the committee had a detailed discussion about the "neutral level" of interest rates - that is, the level that neither depresses nor stimulates the economy. Analysts interpreted this as a recognition by the MPC that the overall stance of monetary policy had been too tight, and speculated that the committee would continue to cut rates, even if the economic data improved.

Kevin Darlington at ABN Amro said: "The minutes were more about when rates would come down further than whether they [the MPC] had hit the right rate now."

Meanwhile, a survey by the Institute of Management revealed that Britain's managers were gloomy about the outlook for next year. Fifty-five per cent of managers did not expect an early recovery in global economic conditions.

Separate figures from the Credit Card Research Group showed that credit and debit-card spending fell 1.3 per cent in November.