MPC ready to counter downturn with rate cut

The Bank of England is ready to cut interest rates if the global economy weakens, with even hawks on its rate setting committee convinced that the risks of a slowdown are greater than of resurgent inflation.

The monetary policy committee voted 8-0 to hold rates at their 38-year-low of 4% at its meeting this month despite industry calls for a confidence boosting cut.

Minutes of the meeting published yesterday reveal that the MPC is leaning towards lowering borrowing costs, even though the housing market continues to bubble away.

"In August, they debated cutting rates and also reasons not to raise rates. Now we see no mention of raising rates," said David Page, economist at Investec.

Unlike the US Federal Reserve, the committee does not formally declare which way it sees rates heading in the future.

City analysts said the minutes showed that their discussion was markedly more dovish than the previous month.

"If the MPC declared a formal bias it would be to the downside," said Geoffrey Dicks, UK economist at the Royal Bank of Scotland.

"Where the August inflation report saw the risks to inflation as slightly to the upside, this month the MPC is ready to cut rates if the global economy weakens further or if clear-cut evidence of a faltering in consumer spending emerges."

More hawkish members of the committee argued that a cut would be premature and could trigger a further burst in house prices and encourage consumers to stack up more debt.

The committee rejected claims that members were sitting on their hands in the face of the slowdown in the world economy.

The minutes noted that the Bank's last forecast had suggested inflation would be moving sharply above the government's 2.5% target at the end of its two-year horizon period. While this would normally have resulted in higher borrowing costs by now, "that the reporate had still not been increased in itself represented a policy response to the changed prospect for inflation".