Bank majority kept rates unchanged

A member of the Bank of England's monetary policy committee broke ranks with his colleagues when he voted for a cut in interest rates for the second month running, it emerged today.

Stephen Nickell was the lone voice in favour of a quarter-point cut - which would have lowered borrowing costs to 4.25% - at the January 11-12 meeting of the nine-member committee.

Bank minutes showed Mr Nickell had argued that economic growth had been below trend for some time, and that Bank projections for trade and investment appeared too optimistic.

He also argued that inflation was likely to fall below the Bank's 2% target once the effects of higher energy prices had dropped out of calculations.

However, the majority on the MPC remained concerned about the "upside risks" to inflation from higher oil and gas prices. Energy prices have started rising again amid concern over the standoff between the west and Iran over Tehran's nuclear programme.

The other eight MPC members also cited uncertainties over import prices and the pound, which were "important influences on the outlook for inflation".

"On balance, it seemed likely that inflation would be broadly in line with the target over the medium term," minutes of the meeting said.

The MPC last cut rates in August. Since then, the feared collapse in consumer spending has failed to materialise while house prices have firmed up, offering the Bank little incentive to stray from its wait and see policy.

Analysts - who had been predicting an early cut in rates this year - have been pushing back their forecasts to the second quarter.

The expectations are that economic growth will weaken, lessening inflationary pressures and allowing for at least another cut.

"Much depends going forward, however, on whether the rebound in GDP growth persists through 2006," John Butler, of HSBC, said.

"With less support from the public sector, we have doubts whether the private sector can fill the void. A resumption of sub-trend growth, at a time when the majority on the MPC believe there is spare capacity in the economy, should push the committee into cutting further."

Meanwhile, economic growth in the UK last year fell to its lowest rate since 1992, figures revealed.

GDP was just 1.8% higher in 2005 than it had been in the previous year, according to preliminary figures from the Office for National Statistics.

Although marginally better than the 1.7% forecast by many City economists, it was well below the 3% to 3.5% predicted by the chancellor, Gordon Brown, in his budget early last year.

Mr Brown was forced to scale back the forecast to 1.75% in his pre-budget report to parliament in December.

GDP was 0.6% in the last three months of 2005 - up from 0.4% in the third quarter - but the fourth quarter rally was not enough to stop annual GDP growth falling to its lowest level for more than a decade. It was almost half the 3.2% rate reached in 2004.

Within the GDP numbers, industrial production shrank by 0.6% in the fourth quarter.

However, service sector activity accelerated - going up 0.9% - driven by strong growth in retail, transport and communications.