Bank 'considered lowering rates

The Bank of England considered lowering interest rates earlier this month, but decided that such a move would be premature, it emerged today.

Minutes for the September 4-5 meeting disclosed that the Bank's monetary policy committee (MPC) considered pre-emptive action in light of a possibly weaker world outlook, but voted unanimously to keep rates at 4%, their lowest level in 38 years.

By even considering the case for lower interest rates only after a few months after discussing the possibility of raising them, the Bank served to underline the fragile economic outlook. As the Bank noted, the world economy "was on balance a little weaker than it had appeared to be a month ago".

The Bank said weakness in the US was reflected not so much in the economic data, but in the fresh turbulence in the equity markets.

In the eurozone, the weakness of domestic demand was more pronounced that previously expected, while the prospects for Japan remained subdued. The one bright spot was strength in other Asian economies.

"Against the background of a possibly weaker world outlook," the Bank said, "pre-emptive action to delay the slowing in [UK] consumption growth might now be warranted."

However, MPC members decided it was "premature to conclude that further stimulus was necessary". Once allowance was made for the effects of the jubilee holiday, the Bank found little evidence that the UK economy was faltering.

"The evidence of consumption growth slowing prematurely was not clear-cut," the minutes said. "To reduce interest rates at this stage could give undue encouragement to households to accumulate yet more debt, and renew the upward pressure on house prices."

The Bank eased the cost of borrowing, in line with other central banks last year, to ward off the effects of a global slowdown. It has held rates at 4% since November last year.

Analysts earlier in the year expected the Bank to raise rates sometime over the summer, partly to offset the boom in housing prices.

Two MPC meetings ago, the Bank deputy governor, Mervyn King, voted in favour of raising rates. But the prospect of higher rates this year has all but vanished given the Bank's assessment that "risks were on the downside." Indeed, the MPC said it was ready to cut rates "if and when additional stimulus to demand were judged to be necessary to meet the inflation target".

The Treasury has set an inflation target of 2.5% for the Bank, and the underlying rate of inflation is currently 1.9%, so there is little pressure on it to raise the cost of borrowing. In a comment in the Bank minutes, Credit Suisse First Boston said: "On balance, we still think the Bank will keep rates on hold for the rest of this year."

Commenting on the minutes, Matthew Taylor, the Liberal Democrat shadow chancellor, said: "The Bank of England is still trying to balance a house price boom with the longest fall in manufacturing output since the second world war.

"If the consumer boom falters before manufacturing and investment recover, there is a real possibility of a recession and rising unemployment."