Bank split three ways over rates as imbalance in economy worsens

The Bank of England is in stalemate over how to set interest rates to tackle a growing imbalance between a consumer boom and industrial recession, it emerged yesterday.

The Monetary Policy Committee decided by nine votes to nil two weeks ago to keep rates unchanged at 4.0 per cent, their lowest level for 38 years. The minutes, which were published as the CBI called for an urgent rate cut to prevent mass redundancies, revealed the first unanimous vote since last February. But the outcome concealed a three-way split on the Monetary Policy Committee. They also revealed marked differences between members, which analysts said meant the Bank was unlikely to change rates in the near future.

Some members believe the Bank must accept inflation will continue to undershoot the Government target rather than cut rates further and risk an "unsustainable" consumer boom.

The Bank's dilemma was highlighted by fresh figures showing consumers were still hell-bent on spending even as manufacturers revealed plans to cut 15,000 jobs a month.

Last month saw an "upsurge" in enquiries from home buyers, triggering the first acceleration in house prices since last July, the Royal Institution of Chartered Surveyors said.

The CBI, the employers' group, urged the Bank to cut rates as its latest survey showed manufacturers were cutting prices at their second-fastest rate since 1958. It said that, together with falling orders and output, this meant profit margins were coming under intense pressure that would force them to cut jobs and investment. It said firms planned to cut 45,000 jobs a month and would cut back on staff training for the first time in the survey's history

"Manufacturers are really under the cosh," said Ian McCafferty, the CBI's chief economic adviser. "They are having to cut back in areas that they would much prefer not to."

He said with inflation low, the Bank could afford to trim interest rates by another quarter point to 3.75 per cent. However, his message was undermined by other elements of the survey showing confidence had improved, and at the fastest rate for almost eight years.

The MPC minutes said that the Bank had decided to keep rates on hold in the face of the different signals coming from the world economy. The US economy had shown "unexpected" signs of revival but the MPC was worried that a rapid recovery late this year "was not yet assured".

Meanwhile, in the UK, retail sales, household borrowing and house prices were strong but inflation low and price pressures were weak. The key issue was whether consumption would slow before the global economy started to accelerate.

"There would be a case for a further reduction in rates if it was thought likely that consumption would slow before the world economy revived," the minutes read. "Alternatively...it was possible that consumption would not slow soon enough, or sharply enough. In that case a rise in rates would be required to keep inflation on track."

Some MPC members went further and said the Bank would have to deter households from accumulating unsustainable levels of debt. "It might be necessary to accept inflation remaining a little below target over the two-year horizon".

On balance the MPC decided there was a "reasonable prospect" that spending would slow naturally at the same time as the world economy recovered "allowing the UK to maintain a growth rate close to trend and inflation close to target".