Bank pair voted for interest rate cut

The City was last night braced for the first cut in interest rates for two years after the Bank of England's chief economist warned that the weakness of growth required cheaper borrowing.

Charles Bean prompted speculation of an August boost to consumer spending and the dormant housing market when it was revealed that he was one of two members of the Bank's monetary policy committee voting for a reduction in rates earlier this month.

Minutes of the MPC's monthly meeting showed that Mr Bean and fellow committee member Marian Bell were the first to vote for an easing of policy since the summer of 2003. Although they were outvoted 7:2 on the nine-strong committee, City analysts said there had been a marked change from the previous month, when there had been talk of rates increasing.

"June's MPC minutes offered strong support for our view that interest rates will be falling as early as August," said Jonathan Loynes of Capital Economics. He added that rates were likely to fall more rapidly than the City was expecting and would reach 3.5% by the middle of next year.

Last night, Mervyn King, the Bank's governor, sought to dampen speculation about an imminent move in rates. In his annual speech to the City at the Mansion House, Mr King acknowledged that consumer spending had been weak in recent months but warned that there were upside as well as downside risks to inflation.

The Bank's task is to hit the government's 2% inflation target, and the governor said it was hard to know whether the rise from 1.1% to 1.9% during the past six months reflected sustained upward pressure.

"The weakness in sales of goods on the high street has been marked," Mr King said. "Nevertheless, consumption of services appears, at least so far, to be more resilient. So it is possible that we are seeing a temporary slowdown in spending, although we cannot be sure."

In trading ahead of the governor's speech, the pound fell on the foreign exchanges and the City's money markets moved to anticipate a cut in interest rates to 4.5% when the MPC meets in early August. Shares in the eurozone reached a three-year high in expectation that the European Central Bank would match any move by the Bank of England.

Analysts said that Mr Bean's dissent from the majority view at this month's meeting was significant, since he was responsible for the inflation report - the Bank's quarterly health check of the economy.

The minutes showed Mr Bean argued there was already a strong enough case for a cut. He and Ms Bell said the poor performance of the eurozone would affect UK demand, that growth was slowing, consumer appetite for credit had abated and there was less labour market pressure.

Demand pressures were less than thought, and the rise in inflation reflected the one-off effects of higher oil prices.

"Although output growth had so far been fairly resilient in the face of weaker consumption, GDP growth was likely to be weaker than in the May inflation report," the minutes record Mr Bean and Ms Bell as saying.

"While there were arguments in favour of waiting for more information before taking action, that risked the slowdown in consumption becoming more entrenched. A small reduction in rates now might obviate the need for a larger reduction in rates at a later date."

George Buckley of Deutsche Bank said: "To say this is a key set of minutes is an understatement. The fact that the chief economist voted for an easing is of particular importance."