Volatility kept rates on hold

Falling share prices prevented the Bank of England's monetary policy committee raising interest rates at its last meeting, it emerged yesterday.

The MPC chose to leave borrowing costs on hold at 4% on July 4, fearing a surprise increase could further unsettle markets shaken by the accounting scandal at US telecoms group Worldcom.

"It was possible that an unexpected increase in interest rates against a background of increased nervousness could have an unintentionally strong impact on both market and business confidence," said the MPC meeting's minutes, published yesterday.

Pressure had been mounting for an rate rise to begin reversing last year's seven cuts in borrowing costs and choke off inflationary pressures as the economy recovers from the present downturn.

But as tumbling share prices on both sides of the Atlantic raised doubts about the durability of the upturn, MPC members feared that "the down side risks might now be greater [than at its last meeting], as a consequence of increased financial market nervousness set alongside the existing longer term economic imbalances in the US."

Mervyn King, the Bank's hawkish deputy-governor, was the only dissenter from the decision to leave rates on hold, voting for a quarter-point rise. The MPC's new independent member, Marion Bell, who replaced the dovish Sushil Wadhwani, sided with the majority.

Analysts said the decisive margin meant borrowing costs were unlikely to rise until late this year at the earliest, and some argued that the case for leaving them on hold had strengthened further since the MPC met.

"The stock market has fallen by another 10%, RPIX [inflation] has fallen to 1.5%, and sterling has risen," said Jonathan Loynes of Capital Economics. "Accordingly, it seems very likely that Mr King will have to throw in the towel at the August meeting."

The MPC meeting's minutes showed some members remained concerned about the pace of price rises in the housing market, describing them as "clearly unsustainable", but said the boom could help maintain consumer spending in the face of falling share prices.