Another cut in UK interest rates edged closer yesterday after it emerged that the deputy governor of the Bank of England Sir John Gieve has moved into the camp calling for reductions.
The minutes of the last meeting of the central bank's Monetary Policy Committee, released yesterday, show that Sir John joined David Blanchflower, who has voted in favour of rate cuts more often than any other MPC member, in calling for a quarter-point interest rate reduction to 5 per cent this month.
While the vote was seven to two in favour of holding rates this month, analysts said Sir John's move made a reduction in April more likely. The deputy governor's move was "unexpected," according to Howard Archer, chief UK and European economist at Global Insight.
"This is probably a consequence of his responsibility for financial stability at the Bank of England, and the particular threat to growth coming from tight credit conditions," he added.
The minutes of the meeting, held on 6 March, highlighted member concern that having cut rates in February, a back-to-back reduction would suggest the MPC was concentrating on downside risks to growth rather than on hitting the Bank of England's 2 per cent inflation target.
Yet analysts believe that as the financial market conditions worsen, some of the remaining members will perform U-turns. Mr Archer said he thought most MPC members would prefer not to lower the rates until May, but that April could now be a "very real possibility" should liquidity remain tight and the money market rates high.
"MPC members have highlighted that tight credit conditions pose a... serious downside risk to consumer spending, business investment housing," he added.
The vote is expected to be tight next month, given the split in opinion relating to the risk of second-round inflation. The monetary committee noted that sentiment in international credit and money markets had deteriorated in February and the uncertainty over growth and inflation outlooks. Alan Clarke, a UK economist at BNP Paribas, said: "In light of the MPC minutes we believe developments since the March meeting are sufficient to prompt a majority on the committee to vote in favour of an April cut."
However, the MPC minutes were published as the Confederation of British Industry published an unexpectedly upbeat picture of the state of the manufacturers sector. The CBI said an increasing number of firms expected to be able to raise their prices in the next quarter, further adding to inflationary pressures in the economy that have been stoked up in recent months by rising food and energy costs.
Despite criticism of his relative optimism on economic growth, chancellor of the exchequer Alistair Darling has defend his forecasts for the UK this year. In last week's Budget, Mr Darling cut his forecasts but said he still expected the economy to grow by up to 2.25 per cent this year. "The forecasts we have set are reasonable and we have taken account of the uncertainty," he told MPs yesterday.