MPC divided over interest rate policy

News of a split within the Bank of England's interest rate-setting committee emerged today after Bank minutes revealed that three members voted in favour of cutting rates earlier this month.

The decision marks the first time in eight months that any members of the Bank's monetary policy committee (MPC) have voted in favour of easing the cost of borrowing.

Minutes from the MPC's meeting a fortnight ago showed that Christopher Allsopp, Kate Barker and Stephen Nickell voted for a cut of 0.25%. But they were outvoted by six votes to three, and rates stayed on 4% for the 11th month running.

Committee members felt that while the rate decision was "finely balanced", they preferred to wait for the Bank's November inflation report before changing their mind.

"Most members, weighing the arguments, preferred to leave the rate unchanged and to review all the recent information in the context of preparing the November inflation report," the minutes stated.

"A further reduction in the rate risks creating an unsustainable increase in debt which might subsequently unwind sharply. This would increase the risk of undershooting the inflation target in the medium term," the minutes added.

The six-three split marks a turnaround from the summer, when there was discussion of a rate increase amid concerns over the steep rise in house prices and the persistent strength of consumer spending. At the time, Mervyn King voted in favour of a rise.

The MPC has left rates on hold since November last year after aggressively cutting borrowing costs to ward off recession.

But the lowest rates in 38 years have fuelled a boom in house prices and consumer spending that has left Britain with a two-speed economy. The manufacturing sector is struggling to recover from its worst slump in a decade even as consumers hit the high street.

The three MPC dissenters cited several reasons for a cut: a weaker global outlook; a sharp fall in share prices; weaker than expected domestic demand; and signs that the housing market is starting to slow.

That line of reasoning surprised HSBC economist John Butler.

"In our mind, it is bizarre that a week following the 4.3% rise in house prices which took the annual rate of increase to 24%, the MPC felt the housing market was showing signs of slowing," he said. "One would think they would be happy with a slowdown rather than trying to re-ignite it."

Mr Butler, like many economists, believes the MPC will keep rates at 4% for the rest of the year, but he acknowledged that November's interest rate decision will be close.

"Since the October meeting, equity markets have bounced ... which if maintained should reduce their appetite to cut. Overall, we believe the MPC will resist and keep rates at 4% for the rest of the year, but the decision is suddenly looking very finely balanced."