Bank was split over rates decision

The Bank of England came within just one vote of cutting interest rates earlier this month, Bank minutes revealed today.

The minutes showed the Bank's monetary policy committee (MPC) at its most divided since January 2001. In its May 7-8 meeting, the MPC voted five to four to keep rates unchanged at 3.75%.

Christopher Allsopp, Kate Barker, Marian Bell and Stephen Nickell voted for a 25-basis-point rate cut. Sir Edward George, the Bank's governor, and Mervyn King, his designated successor, were among the majority.

Those favouring lower borrowing costs cited the risk of weak consumer demand in the UK this year, the lack of any sign of recovery in the eurozone and signs of consumer weakness in the US with unemployment remaining stubbornly high.

"For some members the consequences in current circumstances of failing to make a necessary rate reduction were more serious than the consequences of making one which turned out not to be needed," Bank minutes said.

Those favouring the status quo, however, expressed concern at the inflationary impact of the lower pound, which has fallen sharply since February - the last time the MPC cut interest rates. The drop in the pound and the recent rally in shares, the Bank said, "implied stronger prospects for activity and higher inflation".

Finally, the minutes said, for some members the consequences of cutting rates unnecessarily would be more serious than those of delaying inappropriately if a rate cut led to further sharp falls in sterling.

In fact, the pound fell versus the euro and the dollar following the release of the Bank's minutes. Sterling fell as low as US$1.6390, compared with US$1.6406 before the release, but rebounded slightly later. It dipped from 71.44 pence per euro to 71.38 pence.

Today's minutes increase the likelihood of a rate cut this year. In yesterday's figures from the office for national statistics, inflation remained steady last month at 3% for the third month in a row. That came as a surprise to analysts who said it left open the prospect of another cut this year if activity remained weak.

Commenting on the minutes, Matthew Taylor, the Liberal Democrat finance spokesman, said: "The MPC minutes make it clear that the UK economy is doing far worse than the chancellor claims, and the collapse in investment is putting his tax and spending plans at risk."