Bank kept rates unchanged 'amid economic gloom

The Bank of England voted unanimously to keep interest rates at a 38-year-low earlier this month amid concern over the weakness of the global economic recovery and fragile business confidence in the UK, it emerged today.

But minutes from the Bank's latest monetary policy committee showed that there was considerable debate on the need for an immediate tightening of rates with inflation projected to overshoot the Treasury's 2.5% inflation target in two years' time.

Some members expressed concern that the imbalances in the economy between consumer spending and output would get worse if allowed to persist. Concerns were also expressed that current rates of house price inflation were unsustainable.

"Action now to moderate house price inflation and to check the accumulation of household debt could help to reduce the risks further out," the minutes said.

Despite these fears, the nine members of the MPC agreed to leave rates unchanged for the sixth month running at 4%, their lowest level in 38 years.

"First, it was still not clear that recovery was well established, either in the United Kingdom or in the world generally, or how strong it would ultimately prove to be," the minutes said.

In fact, MPC members were quite gloomy about the strength of the world recovery.

"The committee agreed that the prospects for the world economy now appeared to be a little less strong than it had seemed a month ago," the minutes stated. "The rapid recovery in the United States, associated in large part with the stock cycle, had faltered in the past month and it seemed probable that the pace of the recovery would now moderate."

While MPC members agreed that the Bank would have increase the cost of borrowing eventually, they disagreed on the timing of a rate increase. Before today's release of the MPC minutes, most economists were looking for a rise in July or August, with a few predicting that an increase could come as early as next month.

But the gloomy tone of today's minutes would seem to rule out a rise in the cost of borrowing in June. The dilemma posed by strong consumer spending coupled with weak industrial output - Britain's two-speed economy - remains as acute as ever.

"The immediate issue, of whether UK consumption growth would ease as world demand recovered, or would need to be restrained by policy action, remained much as before," the minutes said.