Bank split over interest rates

Bank of England policymakers were split three ways at this month's interest rate meeting, minutes showed today.

The Bank's monetary policy committee (MPC) had not seen such a split since August 1988 and the divisions underline the uncertainties over the state of the British economy.

Six members of the MPC voted to leave interest rates unchanged at 4.5% for the ninth consecutive month.

Stephen Nickell, who is leaving before the next MPC meeting, again voted for a cut of 25 basis points.

The big surprise was David Walton, an external member, who voted for an immediate rise of 25 basis points.

Only eight members attended the May meeting because Richard Lambert left the MPC abruptly in March and the Treasury has yet to announce his successor.

"Most members felt the stability in economic activity had removed the need to cut interest rates and the lack of inflationary pressures meant there was little need to hike," said John Butler of HSBC.

"The majority on the committee, therefore, seem in little rush to hike, despite David Walton's vote. Nonetheless, the absence of Nickell in June will mean the MPC now have a tightening bias."

In its quarterly inflation report released last week, the Bank's central projection had inflation rising above its 2% target in the short term because of higher energy prices before coming back down.

Inflation last month was on target at 2%, up from 1.8%, in March.

Almost all analysts believe that the MPC's next move will be up, but they disagree on its timing.

Some thought a rise in borrowing costs would come later this year, but others argued that the MPC would not act until 2007.

Mr Butler no longer expected interest rates to be cut in November and instead believes rates will stay on hold at 4.5% throughout the year.

The arguments for higher rates from this month's meeting cited business surveys indicating faster economic growth and better prospects for exports and investments.

The arguments for cutting rates mentioned the risk that consumer spending would be weaker than assumed and the absence of any impact on wages from higher energy bills.

But most MPC members felt that, given the uncertainty over the degree of slack in the economy, it was sensible to wait for further evidence about the likely direction of inflationary pressures.

"Although one MPC member voted for an interest rate hike in May and the committee discussed the case for an interest rate hike as well as a cut, the minutes do not suggest that the majority of the MPC are itching to pull the interest rate trigger in the near term at least," said Howard Archer of Global Insight.