Further rate cuts expected this year after surge in unemployment

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The Independent Online

Interest rates look set to fall again before Christmas after it emerged yesterday that the Monetary Policy Committee was unanimous when it cut rates twice in the wake of the 11 September terrorist attacks.

Some of the Bank of England's rate-setters even pushed for a larger half-point cut, fuelling speculation the next reduction could come as soon as next month.

The minutes of the two meetings, on 18 September and 4 October, echoed comments on Tuesday by the Governor, Sir Edward George, who said the Bank "would not hesitate" to ease policy.

Hopes of an imminent move were boosted by figures showing unemployment had risen sharply even before the attacks, suffering its largest increase for eight years.

Economists said the combined message was that rates were set to fall further. "The minutes reveal a committee that could be easily persuaded to ease rates again should the data over coming weeks take a turn for the worse," said Michael Hume at Lehman Brothers.

The minutes of the MPC's meetings contradicted City rumours of an ugly row over the need for a rate cut.

No one voted for rates to stay on hold. In fact two members – Sushil Wadhwani and Christopher Allsopp – voted for a half-point cut on 18 September with Dr Wadhwani alone calling for similar cut on 4 October.

When the MPC met on 18 September, a day after the Federal Reserve cut rates to a 37-year low, it did discuss keeping rates on hold and instead issuing a reassuring statement. However, it decided delaying a cut risked denting confidence "unnecessarily" given such a move was widely expected. "The committee consequently concluded an immediate reduction in rates was appropriate," the minutes said.

Most believed a quarter-point cut would show the Bank was "prepared to act" while a half-point cut would "convey an exaggerated impression of economic weakness". However, Dr Wadhwani and Mr Allsopp said a half-point cut would be seen as a "decisive approach" compared with an "overly cautious" quarter-point.

The argument was refined at the meeting a fortnight later. While the majority said economic weakness and falling business confidence justified another cut, some were worried it would stoke consumer demand.

Danny Gabay, UK economist at JP Morgan, said: "The MPC seem collectively to be saying that faced with the risk of a recession today or one tomorrow, they chose tomorrow."

Meanwhile, the labour market data showed a rise in unemployment, a fall in the number of people in work and a slowdown in the growth of average earnings.

The Labour Force Survey showed unemployment rose by 53,000 between June and August to 1.51 million, the biggest rise since the first quarter of 1993. The employment level fell by 19,000 to 28.16 million.

The average rate of growth in pay and bonuses dropped from 4.6 to 4.5 per cent, bringing it back within the limit the Bank sees as consistent with its inflation target.

However, the picture was confused by an unexpected fall in the number of people out of work and claiming benefit. The claimant count fell 4,900 to 942,100 – a fresh 26-year low.

In addition, the breakdown of the LFS showed the decline in employment was accounted for a fall in government training schemes, while the rise in unemployment was focused on part-time women.

But economists said the direction of the labour market was clear. Philip Shaw at Investec said: "The question of when the labour market will turn is largely irrelevant – it already has."

Meanwhile, the Treasury said City economists had slashed their forecasts for growth next year to just 2 per cent from 2.5 per cent last month.

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