Bank split and falling jobless total dent hopes of further cut in rates

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The Independent Online

Hopes of an imminent cut in interest rates faded yesterday as unemployment fell to a 26-year low and a deep split emerged in the Bank of England.

Three members on the nine-strong Monetary Policy Committee voted against the controversial cut two weeks ago, the minutes showed.

The opponents of the move, led by the Bank deputy governor Mervyn King, who defended the cut last week, warned the labour market was too tight and a cut might cause the pound to fall.

Official figures for July, also published yesterday, showed unemployment falling, employment rising, wages increasing and unfilled vacancies at an all-time high. Meanwhile, the pound was close to its five-month low against the euro.

The minutes of the meeting on 1 and 2 August showed Mr King was joined by his fellow deputy governor, David Clementi, and the executive director Ian Plenderleith in voting against the cut.

They were out-voted by Sir Edward George, the Bank's Governor, his chief economist Charlie Bean and the four "outside" members. Both sides put forward seven reasons for their position.

Most of them said risks to growth and inflation were on the downside while inflation was forecast to remain below target for two years. They said: "An immediate reduction [in rates] would provide a degree of insurance against a further deterioration in the outlook."

At least one of the six ­ possibly Sushil Wadhwani or Kate Barker ­ discussed the need for a half-point cut but decided this would overstimulate the housing market. Opponents wanted to wait for signs of rising unemployment and slowing consumption growth before cutting rates.

They said: "An immediate cut would exacerbate the imbalances in the economy, by further stimulating consumption in circumstances where the housing market was already buoyant and household confidence was robust."

The minutes showed the decision to cut was based on the Bank's forecast in last week's inflation report rather than on new data.

Stephen Lewis, chief economist at Monument Derivatives, said the split was between the career central bankers and professional economists. He said: "The split is not good for the MPC's credibility, especially as it may reflect the differing views of central bankers and economists on the proper role of the committee."

John Butler, UK economist at HSBC and a former Bank staff analyst, said the split had "downgraded the future value" of the inflation report.

Economists were as divided as the MPC over the implications for rates. Jonathan Loynes, chief UK economist at Capital Economics, said the forecast of low inflation supported his expectation for rates falling to 4.5 per cent. He said: "It would be very unwise to conclude rates have now troughed."

Geoffrey Dicks, at Royal Bank of Scotland, said he doubted the MPC would have cut if it had foreseen a fall in the pound. He said: "The chances of a near-term cut look poor unless the euro falls back."

The hawks' case was boosted by the labour market figures. The number of people out of work and claiming benefit fell by 12,800 compared with a City forecast of 5,000 to stand at a 26-year low of 3.2 per cent.

The number in work rose by 75,000 to 28.18 million in the latest quarter, while the stock of unfilled vacancies rose by 17,100 to an all-time record of 444,300.

The growth rate of average earnings accelerated to 4.8 from 4.6 per cent in June, led by a 5.5 per cent jump in public sector wages.

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