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Rate hopes boosted after MPC dove votes for a cut

David Prosser
Thursday 22 December 2005 01:00 GMT
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The chances of an interest rate cut early in the new year improved yesterday after a surprise announcement that the decision this month to keep the base rate at 4.5 per cent was not unanimous.

The publication of the minutes of the Monetary Policy Committee's discussions revealed one of its nine members, Stephen Nickell, voted for a 0.25 percentage point cut in interest rates at this month's meeting.

Mr Nickell's vote was based on his view that inflation may undershoot the MPC's target of 2 per cent. It was the first time since August that the committee's decision was not unanimous.

Philip Shaw, at Investec, said: "The break in the MPC's unanimity is surprising given the comments suggesting that most members were happy with rates at 4.5 per cent. We think pressure for a rate cut will mount in the coming months as growth remains low, inflation is muted and pay settlements are modest."

The likelihood of an interest rate cut in January or February was also boosted by another prediction that the housing market is likely to remain weak next year.

Halifax said it expected house prices to rise by an average of 3 per cent across the country in 2006, and also warned that prices might not rise at all in certain areas. The bank's forecast was in line with predictions from Nationwide, Hometrack, the Council of Mortgage Lenders and the Royal Institution of Chartered Surveyors, which have forecast house price rises of between 1 and 4 per cent for 2006.

Analysts said the latest retail sales figures from the Confederation of British Industry might spur a more cautious approach from the MPC. The CBI said of the 100 retailers who were surveyed, 31 have sold fewer goods than at this time last year, while 30 have improved sales. The balance represented a major improvement on last month.

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