Split vote at Bank of England lifts hopes of interest rate cut

The prospects of an interest rate cut early in the new year were heightened yesterday after minutes of the Bank of England's interest rate meeting this month showed one of the nine rate-setters had broken ranks and voted for a cut.

Steve Nickell, one of the monetary policy committee's four external members, voted for an immediate reduction in borrowing costs to 4.25%, arguing that inflation had fallen back very close to its 2% target and that the economy was still not growing strongly. As a result, inflation was likely to undershoot the target in future, he argued, which would require a rate cut.

The MPC lowered rates to 4.5% in August in response to a sluggish economy but has since left them steady as inflation was pushed up to 2.5%, in large part by rising oil prices, something the committee feared could be passed through into inflationary wage deals.

But the overall tone of yesterday's minutes seemed dovish, said City economists, as some members fretted that the risks to the committee's central growth forecast, particularly from weak investment and sluggish manufacturing output and exports, remained firmly to the downside.

Other members, though, pointed to a small recovery in retail sales and the housing market, and uncertainty over oil and gas prices, and the upcoming wage round, as good reasons for leaving rates where they are for now.

The City was surprised that Mr Nickell had broken ranks and short sterling interest rate futures moved to price in a higher chance of a cut in February, when the MPC prepares its next inflation projections.

Philip Shaw, chief economist at Investec, said: "The break in the MPC's unanimity is quite surprising, given the host of comments suggesting that most members were happy with rates at 4.5%.

"We think pressure for a rate cut will mount in the coming months as growth remains low, inflation is muted and pay settlements are modest."

James Knightley, of ING financial markets, pointed to recent comments from the Bank's chief economist, Charlie Bean, that November's fall in inflation removed one source of uncertainty for the MPC.

"The minutes," he said, "suggest the debate within the BoE is shifting back towards the idea of rate cuts. Overall, we remain comfortable with our rate cut view for February with a further 25 basis points coming in the second quarter of 2006."

Separately, the Confederation of British Industry (CBI) released its latest poll of retailers. It showed its strongest performance since February, adding to signs from official data and the British Retail Consortium that sales are picking up after a lacklustre year, offering a better-than-expected Christmas for retailers.

The CBI's distributive trades survey, covering the first two weeks of December, showed an even balance of retailers saying sales were better than last year and those saying they were worse. The zero balance is a jump from -35% last month, the worst figure in the survey's history.

The CBI's chief economist, Ian McCafferty, said: "Christmas, in retailing terms, is coming later and later each year as consumers play chicken with the high street and delay their spending in the expectation of late price cuts.

"And this year, with Christmas Day falling on a Sunday, it is likely that most people will leave their shopping until late on, and then continue right until the shops close their tills on Christmas Eve."