Shortened odds for rate cut

The odds on a cut in interest rates next month shortened yesterday after the Bank of England revealed that only after a knife-edge vote did its key decision-making body leave rates on hold in January.

Minutes of the latest meeting of the Bank's monetary policy committee showed that fears of a global slowdown and concern that inflation has been below target for almost two years prompted four of the total of nine MPC members to vote for a quarter-point reduction, bringing the rate to 5.75%.

Chief Bank of England economist Charlie Bean and Chris Allsopp joined DeAnne Julius and Sushil Wadhwani, who both supported an easing of policy at the December meeting, in pushing for a rate cut.

However, the Bank's governor, Sir Eddie George, proposed that rates be left at 6%, and was supported by his deputies Mervyn King and David Clementi, markets expert Ian Plenderleith and Stephen Nickell. They argued that the economy was still strong, with few signs of the slowdown in consumer spending needed to make room for the government's spending plans without exerting upward pressure on inflation.

Further evidence of the resilience of the UK economy came from the Confederation of British Industry's quarterly survey of manufacturing, which showed a slight rise in factory output coupled with increased optimism about the prospects for exports.

While investment intentions remained weak, the CBI found that the competitive pressures on businesses were easing.

For the first time in three years, firms were expecting to be able to rise prices and widen profit margins, the employers' organisation said.

Nick Reilly, chairman of the CBI's economic affairs committee, said that the survey provided mixed news.

"The recent weakening of sterling against the euro and the continuing growth in Europe should help UK exports.

"But signs of a slowdown in the US could be contributing to the further fall in manufacturers' confidence.

"Investment plans remain weak, supporting the CBI's insistence that targeted tax incentives in this area must continue. "We believe a quarter-point cut in rates would not push inflation above target. But it might boost the confidence of companies reviewing their investment plans."

Despite the more upbeat tone of the CBI report, a poll of City economists by Reuters found that 17 out of 20 expected the next MPC meeting to vote in favour of a cut.

Rates have been left unchanged since last February, but the pressure for a cut has grown in recent months.

The latest meeting was held a week after the surprise decision by the Federal Reserve to shave half a point off US rates on January 3 - and the minutes reveal that for some members of the MPC, this had changed the balance of risk "sufficiently to the down side to justify a cut in the repo rate this month".