Stock market slump helped to keep the lid on a rate rise

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The slump in the stock market helped dissuade other members of the Bank of England's Monetary Policy Committee from joining David Walton in voting for a rise in interest rates, the minutes of this month's meeting showed yesterday.

The committee voted by seven to one to keep the base rate on hold at 4.5 per cent for the 10th month in a row.

The pound fell after the minutes were published as analysts in the City said the tone of the discussion was less hawkish than the minutes of the May meeting. Traders had expected another member to join Mr Walton.

Unusually for an MPC meeting, the policy decision appeared to have been dominated by the 10 per cent fall in the London stock market and the 2 per cent rise in the pound's exchange rate since May. "The most significant news since the May Inflation Report had related to developments in financial markets," the minutes said. "If the recent appreciation of sterling and falls in equity prices were sustained, then the consequent impact on import prices and personal sector financial wealth would tend to reduce inflationary pressures."

But it said the falls in asset prices had not been as large as the rises over the previous year. "If households and firms had already assumed some of the sharp price increases over the past year were likely to be sustained, then they might not change their spending significantly in response to the recent price corrections."

The possibility of further asset price falls was cited as one of the risks that inflation might come in lower than expected. Stephen Lewis, the chief economist at Insinger de Beaufort bank, said: "The MPC seems unsure how to modify the forecast in the light of market events.

"The Bank cannot at one time base its projections of above-trend growth on buoyant asset prices and, at another, argue that the level of asset prices may not matter to growth prospects."

The minutes showed the MPC discussed the risks of both higher and lower inflation than the forecast in its May inflation report. On the upside, the minutes noted four risks - stronger growth in Asia and Europe; success by businesses in passing on price increases to consumers; stronger import prices; and the strength of money growth. The main downside risks came from further falls in asset prices, a sharper slowdown in the US economy and continued benign domestic inflationary pressures.