Wafer thin majority kept rates on hold

Homeowners and businesses were spared a further rise in interest rates this month only by a wafer thin majority on the Bank of England's monetary policy committee, it was revealed yesterday.

Minutes of the MPC's meeting on 2 and 3 August showed the closest vote for over a year, with four of the nine members voting in favour of a tightening of policy and five against.

Breaking ranks with the governor for only the second time since joining the committee in September 1997, deputy governor David Clementi sided with the hawks, comprising Mervyn King, John Vickers and Stephen Nickell.

With growth accelerating in the second quarter, the hawks argued for an immediate quarter point increase in the Bank's base rate to restrain consumer spending and prevent a breach of the government's 2.5% inflation target.

But the governor, Sir Eddie George, the bank's markets expert, Ian Plenderleith, and new recruit Christopher Allsopp stayed with the doves - DeAnne Julius and Sushil Wadhwani - who said that overall monetary conditions were already restrictive and that a further rate rise risked sending sterling higher on the foreign exchanges.

The 5-4 majority in favour of leaving the base rate unchanged at 6% was the narrowest since May 99, when the committee was split down the middle about the wisdom of a rate cut and again opted to maintain the status quo.

Interest rate futures rose after the release of the minutes, implying that investors increasingly expect the cost of borrowing to rise again before the end of year.

The pound also received a boost but later fell against both the dollar and the euro on the back of benign US inflation figures.

City analysts said the timing of any British interest rate rises remained uncertain. Figures published yesterday showed an unexpectedly sharp deceleration in earnings growth to 4.1% from 4.6%, suggesting that there was little immediate danger of a pick-up in wage inflation.

However, a further 22,700 fall in unemployment in July, to a total of 1,069,800, indicated that labour market was still tightening and that a shortage of workers could eventually prompt wage growth to recover.

Tumbling unemployment was also likely to underpin consumer confidence.

Philip Shaw, an analyst at Investec bank, said: "Overall this week's inflation data, at least at the retail level, and the further deceleration of earnings weakens the hawks' case slightly. However, it remains clear that the committee feels private sector demand must slow and we remain unconvinced by the latest evidence that this is happening to a sufficient degree."

He added that strong retail sales figures today would strenghten the odds on a move next month.

Geoff Dicks, of the Royal Bank of Scotland, said that sterling's value on the foreign exchanges was the key to future policy moves. "Unless we get some major surprises in the domestic data, we still need a stronger euro to get the last rate hike," he said.