MPC unanimous over 4.5% rate

The Bank of England's monetary policy committee voted unanimously to keep interest rates at 4.5% two weeks ago, minutes of their meeting showed today.

All nine members agreed to keep borrowing costs steady after an unexpectedly close decision in August to cut rates for the first time in two years.

"The 9-0 vote in favour of unchanged interest rates and the overall tone of the minutes indicate that the Bank is very much in wait and see mode regarding inflation and growth developments," said Howard Archer of Global Insight.

The minutes said MPC members were in broad agreement about the nature of the risks to its inflation target of 2%, although members attached different weights to such risks.

On those factors that may push inflation below target, the Bank noted that UK consumption and business investment, and spending in the eurozone had remained weak. If sustained, those developments would push down UK economic growth and ease inflationary pressures.

On the other hand, share prices have continued to rise and inflation has been higher than anticipated over the past year, reflecting more than the impact of higher oil prices.

"There remained a risk that oil prices would rise further. This posed an upside risk to the inflation projection," the minutes said.

Tesco, Britain's biggest supermarket, said yesterday that the rise in oil prices had added £60m to its bills, including heating and lighting.

Oil prices have risen by more than 50% in the past year because of strong demand from the US and China. Prices have also come under pressure because of a lack of refining capacity.

The situation has been aggravated by Hurricane Katrina, which knocked out refineries along the US Gulf coast, sending prices to a record $70 a barrel. Although now somewhat down from those highs, prices are creeping up again amid fears of more damage from Hurricane Rita.

"The MPC had a separate section on oil prices and the implications for monetary policy, reflecting the fact that the rise in oil prices has provided the committee with their biggest surprise since the August inflation report," said John Butler of HSBC.

The Bank, however, said price expectations remained "well-anchored, though there was no room for complacency". The Bank's August report said that if rates stayed at 4.5%, inflation would probably stay around its 2% target in two years.

Some analysts believe the Bank is too optimistic about future growth, and two MPC members - Stephen Nickell and David Walton - have recently acknowledged that growth may well fall short of forecast, particularly because of weak consumer spending.

If growth is weaker than the Bank anticipates, inflation is likely to drop, giving scope for the MPC to cut rates again this year to boost demand.

"We still believe that another 25 basis point interest rate cut to 4.25% is still very possible before the end of this year, although we acknowledge that it could well be delayed until early 2006," Mr Archer said.