Prospects rise of cut in UK rates

The Bank voted 7-2 to hold rates

The prospect of an early cut in UK interest rates has been raised by the latest set of minutes from the Bank of England's rate-setting body.

Two of the Monetary Policy Committee (MPC) - Bank chief economist Charles Bean and Marian Bell - voted for a cut.

However, they were outvoted by the other seven members who elected to keep rates on hold at 4.75%.

The seven argued that further evidence of a consumer slowdown was needed before any rate cuts were made.

Rate cut soon?

The fact that two MPC members had voted for a cut surprised analysts, especially as at the previous meeting in May the committee had voted 8-1 to keep rates on hold, but the dissenting vote was for a rate rise.

We think the Bank will cut after the summer, and UK rates should be heading down to 4% by the end of 2006 David Brown, Bear Stearns

"It is more dovish than expected. There is now a high probability for a rate cut in August," said Holger Schmieding, an economist at Bank of America.

Other analysts also predicted a rate cut within the next few months.

"There is a very definite downside bias to UK growth and inflation prospects and the Bank of England must respond with a rate cut soon," said David Brown, chief European economist at Bear Stearns.

"We think the Bank will cut after the summer, and UK rates should be heading down to 4% by the end of 2006."

Too early

Before the Bank's June meeting, UK retailers had called for a rate cut to encourage shoppers back onto the High Street. The housing market has also cooled, with prices flat this year and the number of transactions down sharply.

The MPC members arguing for a rate cut said that while "there were arguments in favour of waiting for more information before taking action, that risks the slowdown in consumption becoming more entrenched," the minutes said.

"A small reduction in rates now might obviate the need for a larger reduction in interest rates at a later date."

However, those in favour of keeping rates on hold said it was too early to say that a rate cut was needed.

"A reduction in interest rates at this juncture would be a significant surprise and would run the risk of the inference being drawn that the committee believed the situation had deteriorated more than it, in fact, thought," the minutes said.