Rachel Lomax, the new deputy governor of the Bank of England, declared her intention to take an independent stand on the Monetary Policy Committee by voting alone not to cut interest rates two weeks ago, it emerged yesterday.
She voted against her boss, the incoming governor Mervyn King, who led the remaining seven members to call for a quarter-point cut to a 48-year low of 3.5 per cent.
Many in the City were delighted with her decision to become the first MPC member in its six-year history to mark their debut by voting alone against the majority and John Butler, the UK economist at HSBC, said: "She may quickly replace Mervyn King as the so-called hawk on the committee."
Despite the near-unanimous endorsement for the decision, the minutes published yesterday showed the arguments were finely balanced. Both the split and the wide range of views expressed came as a surprise to the City, which yesterday concluded another rate cut was now less likely.
Ms Lomax told her colleagues the economic outlook for the UK was "benign" and the balance of risk lay in favour of making no change in rates. "A particular cause of concern was that the rate of growth of secured and unsecured borrowing by households was still unsustainably high and might be exacerbated by a [rate cut]," the minutes said, echoing Ms Lomax's testimony to the Treasury Select Committee.
Research from Datamonitor published yesterday showed average debt in the UK has risen more than £1,000 a head over the past five years, a 50 per cent rise, as consumer borrowing soared to record highs.
The minutes showed other MPC members felt the argument was finely balanced and only voted for a cut to take advantage of the benefits of a "precautionary" move. The minutes revealsome believed the economic news, especially on house and share prices and on borrowing, had turned positive.
They also noted the potential impact of tax and rate cuts across the world. "The current policy stance was strongly expansionary by historical standards," they said. Finally there were risks that both public and private sector pay would rise while the trade imbalance could worsen if rates were cut. "A further reduction would probably bring forward the time at which a rise in rates would be necessary," the minutes said.
However, these arguments were outgunned by the case for a rate cut. The majority view was that the economic climate, especially for the UK's trade partners, has deteriorated since May, while pay pressure and inflation have both eased.
Additionally, the fall in sterling that had prevented a June rate cut has now reversed, and there was less evidence that a rate cut would stimulate a housing market which was slowing of its own accord. Finally the minutes said: "There was no real advantage to delaying the rate reduction for a further month."
In the City, economists said the size of the majority did not make another imminent cut inevitable, especially as the pound has fallen 2 per cent against both the dollar and the euro since the decision to cut rates. Adam Cole, an economist at Crédit Agricole, said: "Looking forward the MPC does not seem to have its finger on the trigger for another move."
Some economists said there was a clear hint the majority had decided to cut rates now rather than in August, reducing the chance of another cut next month.