MPC split three ways over this month's interest rate cut

Published on Wednesday 23 April 2008 21:40

A FURTHER interest rate cut is still on the cards before the summer despite this month's Bank of England meeting producing the first three-way split in almost two years.

Minutes from April's monetary policy committee meeting, released yesterday, revealed that six members, including BoE governor Mervyn King, voted for a quarter-point rate cut to 5 per cent.

However, arch-hawks Tim Besley and Andrew Sentance wanted to keep rates pegged at 5.25 per cent amid inflation pressure from soaring oil costs.

A single member, David Blanchflower, pictured right, voted for a half-point cut to 4.75 per cent.

The three-way split is the MPC's first since May 2006 and surprised many analysts, who had been forecasting a unanimous decision in favour of lower rates.

Royal Bank of Scotland economist Ross Walker described the difference of opinion as "significant".

"I didn't expect this sort of a split vote so soon," he said. "It is significant. I think the consensus is beginning to break down.

"I don't think this is going to prevent further rate cuts but the idea of easing at an accelerated pace is looking pretty unlikely."

The UK's central bank now looks unlikely to follow the more aggressive stance taken by the US Federal Reserve.

Policymakers here are walking a tightrope between balancing the risks to the economy with a mandate to keep inflation pegged at 2 per cent. Figures released earlier this month showed the Consumer Prices Index holding steady at 2.5 per cent during March.

Richard Snook, an economist at CEBR, said he expected a further quarter-point cut in borrowing costs in May or June.

Referring to the BoE's scheme to allow banks to swap mortgage-backed securities for government bonds, he added: "(The] minutes suggest that June is the more likely (option], although, should the special liquidity scheme fail to have a significant impact, the bank may have to move sooner."

Howard Archer, chief UK economist at Global Insight, also put his money on a June cut, but did not rule out a reduction next month "particularly if credit conditions tighten further".

The minutes showed that even the six MPC members calling for a quarter-point cut appeared split. Some thought downside risks to inflation had increased, but others said that given the likelihood of inflation rising further above the 2 per cent target in the next few months, the issue was less clear-cut.

Members noted that while a fall in the value of the pound was helping to rebalance the economy, it was also pushing up inflation in the near-term.

The minutes were released as fresh figures showed the number of mortgage approvals had fallen by 46 per cent last month to 35,417 – the lowest level since the British Bankers' Association began collecting statistics in 1997.