MPC minutes point to cautious approach to next rate rise

Expectations of another interest rate rise next month faded yesterday after it emerged one member of the Bank of England's Monetary Policy Committee almost voted against this month's quarter-point increase.

Expectations of another interest rate rise next month faded yesterday after it emerged one member of the Bank of England's Monetary Policy Committee almost voted against this month's quarter-point increase.

The committee voted nine-nil to raise the base rate by a quarter-point for the second consecutive month to 4.5 per cent, citing stronger economic growth and inflation and a tightening labour market.

"The balance of risks had moved towards the upside, given the tightening in the labour market and the more broadly based world recovery," the minutes said. "It is important that monetary policy responded so as to ensure that inflation expectations remained in line with the target."

But there was no discussion of a half-point rise in borrowing costs and even some discussion of keeping rates on hold. "For one member the decision was finely balanced," the minutes said. Economists in the City said the minutes were less "hawkish" than had been expected. "The fact that they didn't mention a more aggressive 50 basis point rise in June suggests that a July rate increase looks unlikely," James Knightley, an economist at ING Financial Markets, said.

"There was nothing in the minutes which screamed out 'July rate rise'," added Phil Shaw, a chief economist at Investec.

But they agreed that the Bank was preparing the ground for another rate increase in August to coincide with its revised forecasts on inflation and growth.

The minutes showed that, for most committee members, the Bank's forecasts in May could have justified a half-point increase. The MPC rejected a bigger increase at that time but this month said a further rate increase in June would be understood as a response to this "more robust outlook".

In addition some members - certainly including the deputy governor Sir Andrew Large - said another rate rise would encourage a "more prudent approach" towards borrowing and reduce the scale of any "subsequent shocks".

But there was no repeat of the warning issued last week by Mervyn King, the Bank's Governor, that the risk of a house price crash has risen.

They said there were "some tentative signs" of a slowdown in the housing market, but added: "It was clear that any slowdown in house price inflation would be later and from a higher rate than previously envisaged."

The committee had a brief debate about the option of leaving rates on hold, saying the previous three rate rises had not yet taken their full effect.

They were also concerned that the increase in oil prices may hurt confidence in Britain and abroad.

The Bank added to growing doubts over the accuracy of official manufacturing figures, which have showed a slump where private surveys indicate a boom, for commissioning its own research.

A survey of 166 companies by the Bank's regional agents found that more than three-quarters said output had risen or was unchanged in the first quarter of the year.

The minutes showed there was a lengthy debate about oil prices, which concluded that the overall impact was likely to be "modest".

Nick Stamenkovic, an economist at RIA, an Edinburgh bond broker, said: "The Bank has retained a bias towards tightening but it does not show any urgency to raise rates."