August rate cut was a close run thing according to the BoE’s minutes |
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Published
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Wed, 17 Aug 2005 18:45
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LONDON - The decision to cut the interest rates earlier this month was almost a non-starter as it was revealed today that the MPC voted 5-4 in favor of the cut. This margin is narrower that what was anticipated by analysts who had predicted that the decision would be near unanimous.
The minutes of the August 9 meeting that were released today showed that the Bank of England's governor Mervyn King was not in favor of the rate cut. The deputy governors, Rachel Lomax and Andrew Large, and the executive director, Paul Tucker were in agreement with Mr. King to hold the rates steady at 4.75 percent. This is thus the first time in the history that the governor has been outvoted on a policy decision. According to the minutes, Mr. King and his colleagues argued in favor of holding the rates by saying, "With oil prices likely to remain strong, producer input prices rising sharply, and an acceleration in unit labour costs since the turn of the year, it was too early to conclude that inflationary pressures had abated."
However, the other five members including the Bank's chief economist, Charles Bean felt that holding the rates at this critical juncture would harm the already struggling economy, "It seemed likely that the combined effect of high levels of household debt and the lagged impact of past interest rate increases had accounted for some of the unexpectedly sharp slowdown in consumer spending," they had argued.
This close vote has many City analysts stumped. They had thought that with all the speculation that was making rounds as well as an open call by the Confederation of British Industry would make the rate cut an easy decision for the MPC. That such a thing did not happen is a surprise to many analysts many of who agree that a further rate cut is not a possibility this year, "The minutes undoubtedly reinforce the message from the August quarterly inflation report that not only is the Bank of England in no hurry to cut rates again, but that it is possible that August's reduction could turn out to be the only cut in this cycle," said Howard Archer, the chief UK economist of the consultancy, Global Insight.
His comments were echoed by Simon Rubinsohn of Gerrard, the wealth manager, who felt that the decision to cut the rates was not as solid as previously thought, “The most significant thing to take away from the minutes is the general lack of conviction in the August decision. At the very least, it makes a strong case for believing that base rates will remain on hold for the balance of the year,” he observed.
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