Expectations of cut in interest rates grow

Market expectations of a rate cut early next year rose as it emerged today that a Bank of England policymaker had favoured a reduction earlier this month.

Stephen Nickell broke ranks with colleagues on the Bank's nine-member monetary policy committee (MPC) to vote in favour of a quarter-point cut in interest rates to 4.25%. The news surprised analysts, who had expected another unanimous vote in favour of holding rates at 4.5%.

Britain's leading shares rose immediately after the release of the minutes, hitting their highest level since August 2001 and led by mining and oil stocks.

Economists said the minutes suggested rate cuts were back on the agenda after four months of rates being held steady at 4.5%.

"With one member of the MPC voting for an interest rate cut in December and Bank of England chief economist, Charlie Bean, recently making some dovish comments, the odds of an interest rate cut early in 2006 are rising," Howard Archer, of the consultancy Global Insight, said.

Philip Shaw, of Investec, agreed that the chances of lower borrowing costs in the next few months had risen. "The break in the MPC's unanimity is quite surprising given the host of comments suggesting most members were happy with rates at 4.5%," he said.

"We think pressure for a rate cut will mount in the coming months as growth remains low, inflation is muted and pay settlements are modest."

In arguing for a rate cut at the December 8-9 meeting, Mr Nickell said the projections on investment growth and trade seemed optimistic. He also argued there were no signs that the rapid rise in both oil prices and average tax rates since early 2004 had fed through into wages.

"Taken together, these arguments implied that consumer price inflation was likely to undershoot the 2% target in the medium term," the minutes said.

However, the eight other MPC members, including the Bank's governor, Mervyn King, decided to adopt a more cautious approach. For them, "it was too soon to be confident that the oil price had peaked, and it was unclear how the gas price would evolve in the coming months."

The majority also thought "no change was also justified as the stance of monetary policy was currently mildly accommodative".

Mr King has made it clear that much will depend on what happens in January - an important month for pay settlements. The chances of a rate cut are likely to be higher provided pay claims are moderate.