Bank of England minutes reveal call for half-point cut this month

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Tensions at the heart of the Bank of England's policy emerged last night as the latest minutes of the Bank's Monetary Policy Committee were published. Although all members voted for a reduction in interest rates, David Blanchflower, an external economist, was in a minority of one, urging the others in dramatic terms to follow the lead of the US Federal Reserve and reduce rates by a half percentage point.

The recusant Mr Blanchflower urged that the Bank Rate should be reduced to 5 per cent, because of the "risk of a very sharp slowdown in UK growth". Mr Blanchflower said he had noticed "there were similarities between the recent data and outlook for the UK and those for the US several months previously, especially in the labour market. Subdued pay pressures and increasing spare capacity in firms would mean that the prospective short-term rise in inflation should not carry through to the medium term".

In the event, on 7 February the MPC reduced rates by a quarter percentage point, to 5.25 per cent, by a vote of eight to one.

All MPC members, however, agreed that "inflation was likely to rise sharply in the following few months, given previously announced changes in gas and electricity prices, the upward pressure on oil and food prices, and the more general pressures on imported prices following the recent depreciation of sterling".

The Governor of the Bank, Mervyn King, has spoken of the "delicate balancing act" the Bank faces as the economy slows but inflation rises because of higher world energy and food prices.

Several economic data releases highlighted the difficulties of steering the economy. The CBI's monthly industrial trends survey showed a stabilisation in orders and output expectations – but with firms indicating that they expect prices to rise still further.

More bright news from the "real economy" was contained in the Bank of England's Agents Survey, an annual exercise involving 350 companies. This suggested that higher inflationary expectations do not seem to be pushing pay demands higher, thus implying a brighter outlook for profitability and employment. The Agents found that private sector pay settlements were expected to reach only 3.3 per cent this year, a little down on 2007.

But the housing armlet remains bearish: the Council of Mortgage lenders reported that mortgage lending rose in Jan-uary to an estimated £26.5bn, almost identical to the level a year ago.