Bank minutes hint that August rate rise was one-off

Expectations of a further interest rate rise in the near future took a knock yesterday when the Bank of England hinted it was not in a hurry to raise them again and unemployment hit a six-year high.

The minutes of the August 2-3 meeting of the Bank's monetary policy committee, when it raised rates by a quarter point to 4.75%, showed that six of the seven members voted for the rise. Only David Blanchflower, the newest member, voted to leave interest rates steady because of his concern about rising joblessness.

The minutes showed that the committee thought it was right to raise rates this month and there would be time to reverse the increase if it proved unnecessary. City economists said this showed the committee was not champing at the bit to raise rates further.

"That doesn't sound like a committee with its eye on the next increase. In fact it sounds more like a committee that is concerned a 25 basis point rise might prove too much," said David Hillier, chief UK economist at Barclays Capital.

Vicky Redwood, of independent researchers Capital Economics, said: "The tone of the rest of the minutes was also pretty dovish in suggesting that August's rate rise was a one-off, pre-emptive move, rather than the start of a sustained tightening."

Last week's quarterly inflation report from the MPC, together with comments from the Bank governor, Mervyn King, were read by the City as a strong hint there would be more rate rises to come as the Bank sought to bring inflation down towards its 2% target from its current 2.4%. Yesterday's change of mood in the City hit the pound as markets scaled back their expectations of rate rises to come. The pound fell to a one-and-a-half-week low against the euro of 67.7p and also fell against the dollar until tame US inflation data later in the day pushed the dollar low in its turn. Reduced expectations of interest rate rises tend to push down a country's currency because the returns on assets held there are likely to be lower.

The minutes did show that the central bank intended to keep a very careful eye on the pay round later this year in the light of the recent rise in inflation, which was down to the recent leap in oil prices. Figures out yesterday from the Office for National Statistics showed the MPC was right to be concerned about pay. Average earnings growth picked up to 4.3% in June from 4.1% in May, though the Bank considered pay growth to be under control, especially as companies were offsetting the rise in energy costs by bearing down on wages.

Howard Archer, chief UK economist at researchers Global Insight, said: "If earnings continue to creep up ... another interest rate hike before the end of the year will become ever more likely."

Other economists said they would be keeping a careful eye on indicators of the strength of the economy over the coming weeks, starting with today's figures for retail sales in July.

The ONS data highlighted the Bank's uncertainty over the state of the labour market and the amount of spare capacity in the economy. It showed unemployment still rising. The official labour force survey measure showed a rise of 92,000 in the three months to June, to give a 5.5% jobless rate, the highest since spring 2000.

The claimant count measure rose by 2,000 to 957,000, a four-year high and the 16th rise in the past 17 months. It was though the smallest rise since January and statisticians said the upward trend was now easing. Economists said the fact that the economy was growing faster now than last year could be slowing the rise in joblessness.

Employment also rose, to a record just shy of 29 million. Britain's labour market has experienced an unusual phenomenon over the past year or so where the demand for labour has been increasing, but not as fast as the supply. Britons, particularly the over-65s and the long-term sick, are returning to the jobs market in large numbers and there are large numbers of immigrants arriving, mainly from eastern Europe. This increase in the supply of workers is thought by economists to be keeping a lid on wage rises.