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Bank split on 'difficult' interest rate decision

23/07/2008

The Bank of England was split three ways on the future cost of borrowing this month as it faced a "difficult" decision.

Minutes from the monetary policy committee (MPC) show seven members voted to maintain the status quo with interest rates at five per cent, but David Blanchflower voted for a cut and a further member, Tim Besley, opted for an increase.

Mr Blanchflower has been vociferous about demand to cut the cost of borrowing – saying without it the UK faces the threat of recession.

Meanwhile Mr Beasley pushed for an increase in interest rates to keep "inflation expectations anchored".

With the UK currently facing the threat of high inflation, usually defeated by raising interest rates, and the danger of recession, countered by interest rate cuts, the minutes reveal "the decision was a difficult one".

The minutes showed inflation could be drawn down by the slowing economy meaning "a higher level of Bank rate would not be needed".

The MPC also found increasing interest rates to lower inflation may mean it could eventually fall to low.

The minutes stated: "Keeping Bank rate at five per cent when the economy was slowing was arguably already sending a strong signal of the MPC’s commitment to reducing inflation.

"A rate change this month would be a surprise at a time when credit and other financial markets remained fragile."

Howard archer, chief UK economist at Global Insight, said: "The three-way split in the MPC's voting in July encapsulates the predicament that the Bank of England is in over a deepening economic slowdown yet elevated and rising inflation.

"The overall impression we get is that most MPC members are still firmly in 'wait and see' mood given the current major uncertainties surrounding both the medium-term inflation and growth outlooks."

He added interest rates were most likely to come down in 2009 to as much as four per cent, once the inflation threat had passed.