Unanimous Bank vote left rates unchanged

The Bank of England discussed the arguments for reducing interest rates earlier this month but decided unanimously to leave them unchanged, it emerged today.

That the Bank's monetary policy committee (MPC) even considered lowering the cost of borrowing is a telling indication of growing concern over the economic outlook.

That concern mirrors the US Federal Reserve's own worries as the US central bank yesterday warned of the growing risk of deterioration in the American economy. The MPC in the end decided to leave rates unchanged for the ninth month running at 4%, the lowest level in 38 years.

The vote on the nine-member committee was unanimous as the deputy governor, Mervyn King, this time fell into line with the majority. He had voted in favour of an increase in the two previous meetings.

The MPC discussed the possibility of lowering rates because "the global recovery was fragile; domestic demand in the euro area was weak and imbalances in the US economy (the budget and trade deficits) might still exert more of a drag on output than currently expected," the minutes said.

MPC members eventually voted in favour of the status quo on the grounds that lower rates might feed the housing boom and increase the risk of a crash later. Another argument was that a cut in rates would risk denting confidence by implying that conditions were worse than the committee thought.

"At the moment it doesn't look like interest rates are going anywhere," George Buckley, an economist with Deutsche Bank, told Reuters. "The Bank of England is going to need to see further market weakness or a further deterioration in the economic outlook before it cuts rates. We think rates will be on hold until the end of the year with a 40% chance of a cut in rates."

The continued resilience of the labour market would seem to be another argument against cutting rates. The number of people claiming unemployment benefit unexpectedly fell by 3,100 last month, bringing the jobless rate down to its joint lowest level since 1975.

The office for national statistics said the claimant count fell to just 949,600 in July, confounding City predictions of a rise of around 5,000. The new level is only 4,000 away from February's record low and brings the unemployment rate down to 3.1%, the same as the downwardly revised figure for June.