MPC adopts 'wait-and-see' strategy on interest rates

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The chances of a cut in interest rates in December receded yesterday as the Bank of England's Monetary Policy Committee (MPC) published the minutes of its last deliberations two weeks ago. The minutes show that committee members believed "there was time to wait and see whether ... the projected slowing emerged in the data". They added: "While there had been a clear change in financial markets and credit conditions, the evidence of significant effects on household or business activity was so far limited."

The MPC voted by seven to two last month to keep rates at 5.75 per cent. That was a more "hawkish" stance than expected, but there remains good news for mortgage holders in the minutes, which said: "The central projection in the Inflation Report was conditioned on a market path which included cumulative interest rate reductions of 50 basis points over the next 12 months and a little more thereafter."

The MPC members who voted for a quarter percentage point cut were David Blanchflower, a habitual "dove", and Sir John Gieve, the Bank's Deputy Governor with responsibility for stability in financial markets. Sir John's change of stance – Mr Blanchflower was the only member to vote for a cut in October – may reflect the attention paid in the minutes to stability. "Some financial markets remained fragile, and were still not functioning properly," they warned.

The minutes and the Bank's latest summary of business conditions report a limited degree of "credit squeeze" feeding through to the "real economy". The Bank said that a minority of firms were seeing tighter conditions, and "the latest mortgage rates already reflected some of this tight-ening".Analysts remain convinced that the Bank will cut rates early in 2008. Michael Saunders, of Citi European Economics, said: "The signal that rates will need to fall could not be clearer."

Equity market conditions have deteriorated in the short time since the MPC met, with further upward pressure on the oil price. With a slowdown in economic activity accompanied by inflation in energy and food, the spectre of "slowflation" or even "stagflation" will haunt the economy for some months to come.

A more immediate challenge for the Bank may be ensuring that its official rate strategy is not pushed off course by the credit squeeze. Philip Shaw of Investec said: "We have become very concerned over trends in money markets over the past week."

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