Bank of England split three ways on interest rates

Bank of England split three ways on interest rates

But the minutes did give a hint that an interest rate cut could be on the cards as soon as next month.

Renowned dove David Blanchflower voted for the 10th month running to cut interest rates from their current 5% level while arch-hawk Tim Besley voted to raise them. Blanchflower wanted to prevent recession while Besley wanted to stamp down on inflation. The other seven MPC members voted for no change.

This is the first three-way split on the direction of rates since May 2006 and the decision was "a difficult one" for all nine policymakers given inflation was likely to turn out higher and growth lower than the Bank had thought in May, the minutes showed.

"Keeping Bank Rate at 5% when the economy was slowing was arguably already sending a strong signal of the MPC's commitment to reducing inflation," the minutes said.

"A rate change this month would be a surprise at a time when credit and other financial markets remained fragile, and any change in rates would be better communicated alongside the Bank's August Inflation Report." That may be taken by analysts as a sign the committee intends to resume cutting interest rates next month, sooner than most analysts had been expecting.

Analysts had forecast an 8-1 vote.....continued below

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But there was still a discussion about whether rates should be raised, presumably led by Besley.

"Although it could do little to alter the path of inflation in the near-term, the Committee could, by raising Bank Rate this month, send a strong signal that it was focused on inflation and remained determined to bring it back to target in the medium term," the minutes said.

Arguing against a rate rise, however, there had also been downside news on the economy - and hence for inflation.

"An increase in Bank Rate in the current circumstances, when confidence was low and the financial sector fragile, could impart a downward momentum to the economy that risked a significant undershoot of inflation in the medium term," the minutes said.

James Knightley, economist at ING Financial Markets thought that on balance rates would remain on hold for the foreseeable future.

"It looks as though stable rates are here to stay for several more months. We doubt that rates will be raised given the weak economic backdrop, as highlighted by a news record low in mortgage approvals today, while the plunge in oil prices are also favourable for a lower inflation outlook. Consequently, we see rates at 5% until year-end with rates being cut to 3.5% by the third quarter of 2009."

He was referring to data from the British Bankers' Association showing that the housing market is experiencing further pain as new mortgage approvals fell to an all-time low. British banks granted just 21,118 new mortgages last month, a drop of 67% year-on-year - the biggest fall since the series began in September 1997.