Three-way split on rates

The outlook for British interest rates was shrouded in uncertainty yesterday by news that the Bank of England's monetary policy committee was deeply split when it met to discuss the prospects for inflation earlier this month.

Despite voting unanimously to leave the cost of borrowing at 5% for the second month in a row, the committee divided into three groups over the future direction of policy, according to the minutes of the meeting on August 4 and 5.

While the doves saw inflation undershooting the 2.5% target and were prepared to consider further cuts in rates, the hawks questioned whether or not there should be an increase to cap mounting upward price pressures.

A third group favoured waiting to see how growth and inflation developed.

Analysts said the stalemate could continue for months while committee members wait for definitive data on inflation prospects, although most continue to believe that the next move will be up.

Mixed retail sales figures published yesterday failed to resolve the MPC's dilemma. The month-on-month increase between June and July was weaker than expected at 0.1%, suggesting that high-street spending is not out of control.

However, both the annual rate of increase of 2.7% and the 1.3% gain over the past three months, compared to the previous three, left intact the robust underlying trend in sales.

Philip Shaw, UK economist at Investec in the City, said rising employment and a strengthening housing market should underpin activity over the autumn. He said the MPC's latest inflation report, published last week, projected that in two years, inflation would rise slightly above the target.

"This suggests that the doves are in a small minority. While there seems nothing to warrant an aggressive tightening of policy, we would still expect base rates rising by 0.25 percentage points by the time the year is out."