Policymakers opted for no change in rates

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The Independent Online

Policymakers at the Bank of England resisted lifting interest rates earlier this month as the outlook for the UK's economic recovery worsened, documents revealed today.

April minutes of the Bank's Monetary Policy Committee (MPC) meeting showed members voted six to three in favour of holding rates at their historic low of 0.5% as surveys suggested economic activity had weakened.

The minutes said the majority of members found it was too early to know whether the slowdown in growth at the end of 2010 - when gross domestic product declined 0.5% - was temporary and whether the recent slump in household spending represented a "more protracted weakness" in consumption.

The no-change camp feared developments within the euro area were a risk to the UK, the minutes said, and a rate hike would hit consumer confidence and lead to a further impact on household spending.

The Bank has been battling with inflation well above its 2% target in recent months but has insisted pressure is coming from temporary price shocks such as rising food and oil prices. However, the committee reasserted its belief that inflation could soar past 5% in the months ahead, despite inflation falling to 4% earlier this month.

The voting position of the nine-strong committee remained unchanged this month with Andrew Sentence voting in favour of a 0.5% increase, Martin Weale and Spencer Dale backing a 0.25% rise, Adam Posen reiterating his vote for a second bout of quantitative easing. The remainder voted for no change in policy.

The April minutes suggested those members were still unconvinced that UK economy could cope with impact of an rate hike.

Economists said a rate rise in May, which was previously touted, was now unlikely, given the tone of the April minutes.

Vicky Redwood, senior UK economist at Capital Economics, said: "Admittedly, a May hike is not completely out of the question, given that the MPC will be reviewing its forecasts in the upcoming Inflation Report.

"However, assuming that the activity data maintains its recent weaker tone, we still think that a near-term rate hike will just about be avoided."

MPC members voting in favour of holding rates have previously said they were minded to wait to see how the economy has fared in the first quarter of this year before altering their stance.

The minutes said: "Data on output during the month had been mixed and did not provide clear guidance about the extent to which activity had recovered since the slowdown in growth at the end of 2010."

The minutes added that indicators of household spending and consumer confidence had been weaker than the committee had expected.

The no-change voters also found no evidence that inflation expectations had become entrenched in wage setting - which, if it did, could lead to higher wages and even higher inflation.

The minutes went on: "It was still too early to know whether the slowdown in growth towards the end of 2010 had been temporary, or whether the weakness in contemporary indicators of household spending heralded a more protracted weakness in consumption growth. But news over the month about demand and activity had probably been to the downside."

Fears over the risks presented by developments in the euro area came shortly after Portugal became the third euro nation to turn to the European Union and International Monetary Fund for a multibillion bailout.

The Bank has previously said healthy trade with the EU was paramount to a recovery in the UK.