Bank vote points to UK rate cut

The Bank appears poised to cut rates in August

A cut in UK interest rates in August now appears more likely after the Bank of England voted to freeze rates at 4.75% this month by only a single vote.

Growth and consumer spending worries prompted four members of the Bank's rate-setting body to vote for a cut.

However, the monetary policy committee (MPC) minutes show that the other members argued it was still unclear how severe the consumer slowdown was.

The news pushed sterling to a four-month low against the euro.

The 5-4 vote in favour of keeping rates on hold followed a 7-2 split in June.

The four MPC members who voted for a rate cut were Kate Barker, Stephen Nickell, and David Walton, and the Bank of England's chief economist Charles Bean.

Slowdown

A number of industry bodies have called for an interest rate cut to help stimulate the UK economy.

We think the Bank's rate target should be 4% by mid-2006 David Brown, Bear Stearns

Most analysts now think the MPC will shave rates by a quarter percentage point next month, bringing rates down to 4.5%.

"With four members of the MPC voting for lower interest rates this month, a 25 basis point cut in August still seems highly probable," said Howard Archer at Global Insight.

Last month, the Office for National Statistics revised the UK's growth for the first three months of the year down to 0.4% from a previous estimate of 0.5%.

Figures due out later this week are expected to show that the slowdown is continuing into the second quarter.

"Given the way the growth is slowing right now, the Bank of England must act quickly to stop consumer-led slowdown turning into a consumer-led recession," said David Brown at Bear Stearns.

"We think the Bank's rate target should be 4% by mid-2006," he added.

Last year, the Bank raised interest rates, partly in order to cool the over-heated housing market.

The Bank will also produce its quarterly inflation forecast in August.

Bombs

The last rate decision was announced on 7 July, the same day as bombers hit the London transport network.

However, the minutes show that although the MPC members were aware of the blasts they did not influence the committee's decision.

"The decision on interest rates was reached solely on the economic merits, and no committee member argued that it should be altered to reflect unfolding events," the minutes said.

In contrast, in the United States the Federal Reserve reduced interest rates several times to keep the economy going after the 9/11 attacks on the World Trade Center.