Page last updated at 09:34 GMT, Wednesday, 20 August 2008 10:34 UK

Three-way split again on UK rates

Bank of England building
The Bank is facing tough choices over interest rates

Bank of England policymakers were split three ways for the second meeting in a row at their interest rate-setting meeting earlier this month.

Minutes of the meeting showed seven members of the Bank's nine-strong rate- setting body voted to hold rates at 5%.

However, Timothy Besley voted to increase rates to 5.25%, while David Blanchflower voted for a cut to 4.75%.

The minutes showed most wanted to hold rates because although inflation was rising, growth prospects had worsened.

Rate dilemma

In recent months, the Bank of England's Monetary Policy Committee (MPC) has faced tough choices over the level of UK interest rates, with the economy experiencing both accelerating inflation and slowing growth.

Latest figures showed CPI inflation hit 4.4% in July, more than double the 2% target rate. However, the UK economy grew by just 0.2% in the second quarter of the year.

There was more worrying news for the Bank on Tuesday as a survey suggested that Britons' inflation expectations were running at their highest level for 16 years.

The latest Barclays Survey of Inflation Expectations found inflation was expected to be at 4.8% in two years' time, the highest reading since comparable records began in 1992.

The tone of the discussion confirms that the interest rate debate remains finely balanced for now
Jonathan Loynes, Capital Economics

The minutes of the August meeting showed the MPC considered the pros and cons of raising, holding and cutting rates.

It noted that a rise in rates would "send a strong signal to wage and price setters" that the Bank would not allow inflation to remain above the 2% target rate for long.

However, it also noted that a rate increase could hit business and consumer confidence, making a downturn "unnecessarily deep".

Against this, while a rate cut might prevent the worst of any downturn, it could increase the risk of "elevated inflation persisting".

Most members of the MPC concluded that the current level of rates was "broadly appropriate".

The committee noted that in the past month, while news on economic activity had continued to worsen, news on the inflation outlook had been more mixed, with oil prices falling.

Recession warning

"The tone of the discussion confirms that the interest rate debate remains finely balanced for now, with most members concluding that the outlook for growth had worsened, but that the risks to the inflation outlook remain on the upside," said Jonathan Loynes, chief European economist at Capital Economics.

"Accordingly, there is little here to suggest that other members are about to join Blanchflower in voting for a cut in the very near future," he added.

"Nonetheless, with inflation close to a peak and the economy heading towards recession, we still think rates could be falling by year-end and will eventually drop much further than the markets expect."

The British Chambers of Commerce (BCC) said it expected rates to remain at 5% for the next two to three months.

"However, we remain convinced that the threats of recession are more immediate and severe than the risks of higher inflation," said David Kern, economic adviser to the BCC.

"Once it is clear that inflation has peaked, the MPC must cut rates without delay in October or November."

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