Hopes of a summer rate cut were boosted yesterday after it emerged that the Bank of England came within one vote of taking action earlier this month.
The Monetary Policy Committee was split down the middle on 8 May when the four "outside" experts were out-voted by the five Bank officials to keep interest rates at 3.75 per cent.
This is the first time in the six-year life of the committee that there has been a split along "party" lines.
"The five Bank 'insiders' ganged up to out-vote their external colleagues and prevent an interest rate cut," said Angus McCrone, senior economist at the Centre for Economics and Business Research. "It will only take one of the Bank staffers to switch sides to give the outsiders the advantage at the next MPC meeting on 5 June."
The final outcome would have depended on the Governor, Sir Edward George, who always votes last. It was the first time he has had the deciding vote in more than two years.
The minutes showed the two groups were diametrically opposed on every issue, which analysts said presaged further knife-edge votes in the coming months.
The committee agreed that its new inflation forecasts were consistent with either a small rate cut or leaving rates unchanged. "The policy decision therefore depended in large measure on the balance of risks surrounding the projections," they said.
The "Bank pack" - Christopher Allsopp, Kate Barker, Marian Bell and Stephen Nickell - focused on the weak growth projection and the downside risks to the forecast as well as the weakness of global demand. They were also worried about a housing market crash.
"The consequences in current circumstances of failing to make a necessary rate reduction were more serious than the consequences of making one that turned out not to be needed," the minutes read.
In contrast the Bank staffers - Sir Edward, Charles Bean, Mervyn King, Sir Andrew Large and Paul Tucker - cited the rising trajectory in the inflation forecast and the upside risks to the forecasts as well as the potentially inflationary impact of the pound's fall. They were worried about a continued housing boom.
"The consequences of making an unnecessary rate reduction now would be more serious than those of delaying inappropriately," they said.
The sterling markets reacted to the closer than expected vote by pricing in a 90 per cent chance of a rate cut next month and the possibility of a further cut in the summer.
Geoffrey Dicks at the Royal Bank of Scotland said: "This vote opens up the possibility of another cut in the coming months. It seems unlikely that the four externals will back off."
Adam Cole, a senior economist at Credit Agricole, said today's retail sales data and tomorrow's revision to the first-quarter GDP could swing votes at the June meeting.
However, the outlook is confused by a change of membership that will see Mr Allsopp - who has voted to cut rates in every one of the last eight months - replaced by the former Financial Times editor Richard Lambert.
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