Doves raise rate cut hopes

Industry and City hopes of a confidence boosting reduction in interest rates soared yesterday when the Bank of England revealed that three members of its policymaking committee favour a pre-emptive cut to shore up the economy.

Hawks on the Bank's nine-strong monetary policy committee won the day at their meeting this month despite a renewed slide in share prices and a weaker outlook for the world economy. After a finely balanced discussion, the MPC opted to keep rates unchanged at a 38-year low of 4%.

The decision of three of four independent members to vote for an immediate quarter point reduction unleashed speculation in the City that the doves could be in the ascendant by the committee's next meeting. "Given the surprise on the vote - the committee was only two members away from sanctioning an easing - the chances of a rate cut on November 7 have clearly increased," said Alan Castle, economist at Lehman Brothers.

Rates have been on hold since last November and the only dissenter from the MPC's consensus over the summer, deputy governor, Mervyn King, favoured higher borrowing costs. It is the first time since February that any MPC members have voted for lower rates.

The three members who favoured lowering rates, Chris Allsopp, Kate Barker and Stephen Nickell, pointed to the rout on the stock market and the slowdown in the world economy since the summer which had increased the risks facing Britain. With inflation projected to be below the government's 2.5% target for most of the next two years, they said the MPC had room to cut rates.

"Without a pre-emptive repo rate reduction now, domestic demand growth might fall faster than currently envisaged, leaving inflation below target for longer," the minutes said.

The hawks countered by pointing out the risk that further reductions in borrowing costs could add more fuel to the rapidly overheating property market. "An interest rate reduction seemed likely at present predominantly to affect house prices, household borrowing and consumption, which were already increasing strongly," the minutes noted.

John Butler, UK economist at HSBC markets said the committee was boxed in by soaring property prices. "The housing market and the consumer are the only parts of the economy responding to lower interest rates. Surely it cannot be prudent to cut rates when house prices inflation is currently above 20%."

With the Bank about to undertake its quarterly assessment of the inflation outlook, City analysts said the odds of a rate cut in November had shortened.

"Barring some surprisingly strong economic data between now and the November MPC, a rate cut is now more likely than not, particularly if the Fed cuts US interest rates on the day before," said Jonathan Loynes, chief UK economist at Capital Economics. Government bonds and short sterling futures rallied sharply after the minutes were released as traders bet on a rate cut by the end of the year.

The first snapshot of growth in the third quarter, released by the office for national statistics tomorrow, will give a clearer picture of how the economy is weathering slower global growth and continued stock market turbulence.