Knife-edge rate vote raises hopes of cut

The Bank of England dropped a broad hint yesterday about a possible cut in interest rates after revealing that four of the nine members of its monetary policy committee had voted for lower borrowing costs in a knife-edge decision a fortnight ago.

Sir Eddie George, the Bank's governor, used his casting vote to maintain the status quo of 3.75% when the four external members of the committee appointed by Gordon Brown found their calls for a reduction in rates opposed by the quartet of full-time Bank officials.

The closeness of the vote - the first five-four outcome since early 2001 - reflected a split on the MPC over the impact on inflation of the falling pound, but the minutes of the meeting indicated that some of those opting for a hawkish line in May were willing to switch sides.

"Other things being equal, if sterling reversed its recent decline, and if activity continued to be weaker than expected, the case for an interest rate reduction would then be stronger."

Alan Castle, economist at Lehman Brothers, said: "The probability of a cut in June is probably now quite close to 50%, but much will depend on the movement of the exchange rate and the domestic data flow."

The minutes show that Kate Barker, Marian Bell, Steve Nickell and Chris Allsopp all voted for an immediate cut. They argued that the Bank's own forecasts pointed to lower growth than three months earlier and that there was a risk that the economy's performance would be weaker than Threadneedle Street was anticipating.

In addition, they expressed pessimism about the eurozone and the US economy, and said the committee should downplay Bank forecasts of rising inflation two years ahead because there would be time to take remedial action.

"For some members, the consequences in current cir cumstances of failing to make a necessary repo rate reduction were more serious than the consequences of making one which turned out not to be needed. In the latter event, the reduction could be reversed quickly," the minutes said.

The doves warned that confidence might be further dented if it were later found that a cut in rates had been required, and that would make it more difficult for the Bank to revive economic activity.

In the end the minutes show that the wait-and-see approach taken by the other five members of the committee won the day. The Bank's two deputy governors, Mervyn King and Sir Andrew Large, its chief economist, Charlie Bean, and the director in charge of markets, Paul Tucker, expressed concern about the im pact of a falling pound on prices.

Warning that the pound had fallen sharply in the run-up to the meeting, the four Bank insiders said inflation was already close to its 2.5% target and there were risks that it might go higher, especially if lower rates triggered a run on the pound.

Alan Greenspan, the chairman of the US Federal Reserve, also suggested yesterday that he wanted to see more post-Iraq data before sanctioning a further reduction in US interest rates from their 40-year-low of 1.25%. Giving testimony to Congress, Mr Greenspan said talk of a pick-up in the second half of 2003 was "not unreasonable".