The Bank of England's Monetary Policy Committee voted seven to two against making a further cut in interest rates earlier this month amid fears that spending might suddenly collapse next year if consumers were encouraged to take on more debt.
Sushil Wadhwani and, to the surprise of some observers, Christopher Allsopp, were the only members of the MPC to call for a quarter-point cut when it met in the first week of this month. Rates were left unchanged at 4.0 per cent.
Minutes of the meeting released yesterday showed that the issue for the majority of the committee was balancing the need to boost demand and support the inflation target, against the risk of households building up excessive debt, which might cause a sharp correction in consumer spending.
The majority of the committee argued that consumer confidence was firm or improving, and November's half-point cut in interest rates had yet to have its full impact on the economy. Low inflation may only be a short-term phenomenon, while recent weakness in investment spending possibly reflected a deferral of decisions into early next year following the 11 September terrorist attacks.
"It would probably require a serious threat to job prospects for consumption growth to slow sharply," the minutes said. "Indeed, it was remarkable how resilient the consumer had been to recent shocks."
However, some committee members, who were not named, had said a cut was necessary to buttress business confidence ahead of investment decisions relating to next year. The Bank has cut rates seven times this year from 6 per cent.
Economists were divided as to the prospects for a further cut in interest rates early next year. Simon Rubinsohn, chief economist at Gerrard, said: "Rising unemployment in the new year could still encourage a greater degree of consumer caution especially with outstanding debt now at a record level. There is a better than even chance of a further base rate cut."
John Butler, UK economist at HSBC, said: "Interest rates have already troughed. However, we do not believe they will start to rise until near the end of 2002 due to the lack of inflationary pressure."
Separately, it emerged that Britain's global trade deficit had fallen a little more than expected during October, to £2.31bn. National Statistics said the shortfall in the value of goods traded with the European Union fell to £625m, the biggest deficit since May 2000.
But the trend in export volumes, to non-EU countries in particular, was improving with volumes rising by 0.3 per cent in the last three months over the previous three months. Almost all of the rise was attributable to booming car exports.
National Statistics also said the UK companies had spent more on investment during the third quarter than previously thought, registering a fall on the previous quarter of only 1.6 per cent rather than the earlier estimate of a 4.1 per cent drop. Manufacturing investment was down 10.3 per cent during the period.Reuse content