Rates freeze drives down the pound

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The Independent Online

The pound tumbled to a nine-month low yesterday after the Bank of England revealed that its Monetary Policy Committee did not discuss raising interest rates earlier this month.

It was the first time for a year that there had been no debate over the need for higher rates, fuelling speculation that monetary policy is on hold until at least the New Year.

The MPC unanimously decided to keep the base rate unchanged at 4.75 per cent on 7 October, the minutes of the meeting showed.

The pound fell to 69.68p against the euro - its lowest level since January - while its trade-weighted index, which is watched closely by the Bank, tested nine-month lows of 101.7.

But the Bank left open the option of raising interest rates next month, saying its November Inflation Report would attempt to unravel "puzzles" in the economy.

The minutes showed the MPC believed the impact of the latest weak data on output and demand would weigh on the downside while the fall in the pound and rise in share prices would be "supportive". They said: "The forthcoming Inflation Report process would allow the committee to weigh all these developments together in assessing the outlook for inflation."

It said it was puzzled by the modest rise in pay pressures despite record employment levels and the fall in inflation at the same time that GDP and money supply growth have both accelerated. "These issues added to the uncertainty of the outlook for inflation and the committee would be able to consider them further during the November [forecast] round."

The committee was clearly swayed by the slump in inflation in September to 1.1 per cent, "materially lower" than the Bank's forecasts and the Government's 2.0 per cent target. Without rising petrol and oil costs, it would have hit the 0.9 per cent level requiring a letter of explanation from Mervyn King, the Governor, to Gordon Brown.

Although the unanimous decision had been widely expected, analysts were divided over the implications for the path of monetary policy going forward.

Philip Shaw, the chief UK economist at Investec, who expects a hike in February, said: "This month's decision was reasonably straightforward, but next month's Inflation Report will be critical. Clearly the economy would have to expand at a faster pace to prompt further action from the MPC but the minutes suggest it has not ruled it out - and nor do we."

Alan Clarke, an economist at BNP Paribas, said the decision to mention money growth and the tight labour market showed the MPC still had a "tacit bias" to tighten. "But this is a tactical strategy aimed at not sending too clear a signal that rates have peaked in order to avoid reigniting the housing market."

The was fresh evidence of a slowdown in the housing market from figures showing the first year-on-year drop in mortgage lending for four years.

The Council of Mortgage Lending said banks lent a total of £25.4bn, 2 per cent down on the £25.9bn they lent in September last year. Loans for house purchases fell by 12 per cent between August and September to £11.2bn, 23 per cent down from the July peak. Michael Coogan, the council's director general, said: "All the latest lending data reinforce evidence that the expected slowdown in the housing market is materialising."

The Building Societies Association said that gross and net advances were down on the same time last year, while loans agreed but not yet made decreased to £2.81bn from £5,151bn in September 2003.

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