Bank split still leaves door open to interest rate cut

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The Independent Online

Hopes of an imminent cut in interest rates rose yesterday after it emerged the Bank of England was split over its decision to leave policy on hold this month.

The Monetary Policy Committee divided by six votes to three to keep rates at 3.75 per cent, which analysts said had left the open for a cut as soon as July.

This was the fourth month in a row that the MPC divided over its decision to keep rates unchanged, following the tight five-four split in May.

Analysts ignored the wider margin this month, saying it was due to the replacement of Chris Allsopp by Richard Lambert on the committee. As is usual for a debutant, Mr Lambert voted the same way as the Governor.

The three dissenters ­ Kate Barker, Marian Bell, and Steve Nickell ­ said a cut was needed to tackle the growing weight of negative economic news. They said there was mounting evidence that the downside risks to the UK economy were starting to crystallise.

"It matched our expectations. We expected a 6-3 vote with Lambert, the new member, siding with the majority. We were also expecting a pretty similar tone to the previous month's minutes in May," said Alan Castle, an economist at Lehman Brothers.

"There's quite a chance of a rate cut in July, though our best guess is the Bank cuts rates in August. But the chances of a rate cut have increased over the last few weeks and the minutes don't change our minds on that."

There was also little sign the fall in sterling had triggered a rebound in experts, a surge in wage claims or a lift to economic growth. "A boost to the economy was therefore warranted to offset the current weakness in activity and to ensure that output returned quickly to trend," they said.

The key argument for the majority was the failure of sterling to reverse its depreciation between the May and June meetings. "Its subsequent stability at this lower level was therefore upside news for inflation," they said.

They took the opposite view on the overall economic picture saying that the outlook for both the US and the UK looked more positive.

In particular, they said the chance of an "abrupt correction in the housing market" had receded. But they warned a rate cut could raise the chance of a sudden collapse in consumer spending if households were encouraged to take on even more debt.

Analysts said the minutes were in line with expectations. The pound ended at 69.71 against the euro and $1.6772, while gilts eased slightly.