Bank considered UK rate rise

The Bank of England: Inflationary fears

The Bank of England had been considering raising interest rates this month, minutes of key a meeting have revealed.

On Tuesday, the Bank cut interest rates by 0.25 percentage points to 4.75%, following the lead of other central banks around the world, to boost confidence in the global economy.

But just two weeks before, when a meeting of the Bank's Monetary Policy Committee (MPC) decided to leave interest rates unchanged, only one committee member voted for a cut, minutes of the session have revealed.

The majority of MPC members said that the downside risks to the UK economy - which had led them to back a rate cut in August - were now less serious, the minutes showed.

"There was no sign that consumption growth was slowing, nor of the long-awaited turning point in the labour market," the document stated.

But the committee decided that reversing its rate cut decision just one month later would be too upsetting to the markets.

"An immediate reversal of last month's reduction would surprise the markets... and would imply an unrealistic degree of fine-tuning," the MPC members agreed.

Changed climate

The minutes hint at the difficulties the Bank faced in joining this week's international effort to restore economic and market confidence following the terrorist attacks on the US.

The inflationary pressures on the UK economy were thrown into sharp relief on Tuesday, when the underlying measure of inflation rose above its 2.5% target for the first time in more than two years.

In a statement explaining its latest rate cut, the Bank of England said that while it is was too soon to assess the scale of the impact of the attacks on the UK economy, the direction of that impact and the associated risks were clear.

Most analysts are expecting a sharp slowdown in the world economy, which is bound to affect the UK.

But the Bank minutes revealed concern among MPC members over the level of wage settlements and the continuing boom in house prices, which are rising at more than 10% per year.

The Bank has now cut interest rates four times this year.

But with interest rates still much higher than in the US or the eurozone, many economists still believe there is scope for further reductions.

"We have already seen that consumer confidence in the US cracked even before last week's events," said Neil MacKinnon of Merrill Lynch in London.

"The likelihood is that consumer sentiment in the UK, Europe and elsewhere will weaken and remain somewhat depressed."