MPC minutes reveal stalemate over interest rates

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The Independent Online

Hopes that interest rates in the UK have peaked receded yesterday after it emerged that the Monetary Policy Committee voted by the narrowest of margins to keep rates on hold. It is the second month running that the committee has split 5-4.

Hopes that interest rates in the UK have peaked receded yesterday after it emerged that the Monetary Policy Committee voted by the narrowest of margins to keep rates on hold. It is the second month running that the committee has split 5-4.

Sir Eddie George, the Governor of the Bank of England, cast the deciding vote and again found himself on the opposite side from his two deputy governors and his chief economist.

Minutes of the MPC meeting on 6 and 7 September showed two groups appeared to be even further entrenched in their views of the correct path for monetary policy.

Analysts said the stalemate meant it was impossible to say rates had peaked and some warned there would be another hike before the year was out.

Sir Eddie was joined by "outside" members Christopher Allsopp, DeAnne Julius, and Sushil Wadhwani as well as Bank executive director Ian Plenderleith in voting for rates to stay at 6.0 per cent. He was opposed bydeputy governors Mervyn King and David Clementi, chief economist John Vickers and the academic Stephen Nickell. The split was identical to the August meeting. "Most members felt there had been little news on balance over the month," the minutes said.

The market had expected a six-three vote, and sterlingsurged by almost a cent against the dollar to $1.4135 and by more than half a penny to 59.96p per euro.

The doves advanced a range of arguments for leaving rates on hold. They said there were more signs domestic demand was slowing, citing the housing market and retail sales. They also focused on weak pay figures, record low inflation and said a rate rise could push the value of the pound up. "Given the present benign picture on earnings and inflation there was still time to react to inflationary pressures later," the minutes said. "The risks to waiting were not great."

The other camp turned that argument around, saying an immediate quarter-point rate hike was needed "given that there were no pressing reasons to postpone such a move".

The hawks said the housing market was still strong, public spending increases were feeding into the economy, the labour market was tight and there was little sign of a structural improvement in productivity. They said inflation had been kept low by the strength of sterling and that it would start to rise unless domestically generated inflation started to fall.

Ciaran Barr, chief UK economist at Deutsche Bank, said: "We will need to see conclusive data before the deadlock will be broken." There was little guidance from money supply and lending figures, the only economic data published yesterday.

The British Bankers' Association said mortgage loans rose by £2.18bn from £1.88bn. Director-general Tim Sweeney said: "Against reports of a more stable housing market, the increase was in line with the recent trend."

The Council of Mortgage Lenders said its estimate of mortgage lending rose to £7.3bn from £7.2bn. Michael Coogan, director-general, said: "This suggests the market is stabilising and adds further support to the decision not to increase rates."

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