Bank unanimous on holding rates

Expectations of an imminent rate cut faded today as it emerged that the Bank of England's monetary policy committee had declined to discuss the case for lower borrowing costs this month as it voted unanimously to hold rates.

As anticipated, minutes of the MPC's October 5 and 6 meeting showed a 9-0 vote in favour of keeping rates at 4.5% for the second month running. However, the lack of any discussion of the case for lower rates was more unexpected.

"I'm surprised there was no discussion at all of a rate cut this time, which I think is going to make people think that [a] November [cut] is definitely out," George Buckley, of Deutsche Bank, told Reuters.

The minutes reflected official anxiety about the impact of higher oil prices on inflation, saying there was little sign higher prices were feeding through into either wage settlements or inflation expectations.

"If such effects were to take hold, the committee would need to run a tighter monetary policy than would otherwise have been the case," they said.

Yesterday, official data showed the annual rate of inflation nudging up to 2.5% in September - its highest level in more than nine years - with transport costs providing the biggest push to the consumer prices index (CPI).

It was the third month in a row that inflation was above the Bank's 2% target, but officials believe it will eventually return to its target level as oil prices come down from recent record highs.

Many analysts have been predicting another rate cut before the end of the year because of the consumer slowdown and weak economic growth figures.

However, the minutes showed there was scepticism about the data. "It was possible that the deceleration in output was less pronounced than indicated by official data," they said.

Bank officials also said figures showing a slowing in the service sector were at odds with the strength of business surveys and a resilient jobs market.

The minutes said that, on balance, the short-term prospects for growth and prices were little changed from its August inflation report and that the MPC would have more time to assess the demand and supply outlook when it prepared its next set of forecasts in November.

Although the minutes diminished expectations of a rate cut by the end of the year, analysts said they still expected borrowing costs to come down as below-trend economic growth and a weakening labour market alleviated inflation concerns.

"We expect interest rates to be cut to 4% by next spring, even if the Bank does not move again until the new year," Howard Archer, of the consultancy Global Insight, said.

ING economists also believe the Bank remains too optimistic in its growth assessment.

"With retailers lacking pricing power, we predict that CPI will fall more quickly and substantially than the BoE are forecasting," an ING statement said.

"As such, while a November rate cut is looking less likely than it did a few weeks ago, we continue to believe that the Bank will cut rates by 50 basis points in the next six months."