Bank split three ways on best path for interest rates

By Sumeet Desai and Matt Falloon Reuters - 1 hour 53 minutes ago
LONDON (Reuters) - One Bank of England policymaker wanted to raise interest rates this month and another wanted a cut, but the remaining seven chose to keep them steady as both the inflation and economic growth outlook had deteriorated.
Minutes of the July 9-10 policy meeting on Wednesday showed that hawk Timothy Besley wanted an immediate quarter percentage point increase to 5.25 percent, while dove David Blanchflower argued that a cut was needed to prevent a recession.
This produced the first three-way split on the direction of rates since May 2006 and policymakers said the decision was "a difficult one" as inflation was likely to turn out higher and growth lower than the Bank had forecast in May.
Analysts had forecast an 8-1 vote for steady rates this month, with Blanchflower wanting a cut. Most expect rates to stay put for now before eventually falling as the economy slows.
However, sterling rose and bonds fell as the unexpected vote indicated there was little broad-based support for lower interest rates among policymakers.
If anything, members of the Monetary Policy Committee appeared more inclined to raise rates to defend their reputation as guardians of price stability, but they were also worried about the economic costs of such a move.
"The minutes are certainly more hawkish than we expected," said Philip Shaw, chief economist at Investec. "The committee gave serious consideration to tightening policy this time round.
"The outlook for interest rates looks more uncertain."
STRONG SIGNAL
The minutes said there was little the Bank could do to tame inflation in the near-term, but also said that a rate rise this month could "send a strong signal that it (BoE) was focused on inflation and remained determined to bring it back to target".
Arguing against a move that would have caught markets hopping, however, policymakers noted significant downside risks to the economy -- and hence for inflation in the medium term.
"An increase 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.
Policymakers noted that while official second quarter GDP data due on Friday could turn out slightly stronger than expected, survey evidence and reports from the Bank's own agents suggested the economy was continuing to slow.
"Keeping Bank Rate at 5.0 percent when the economy was slowing was arguably already sending a strong signal of the Monetary Policy Committee'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."
Evidence of a sharply slowing economy continued to roll in on Wednesday, with banks reporting approvals for home loans tumbled by two thirds in June to a record low, pointing to further sharp falls in house prices in the next few months.
The Confederation of British Industry said optimism in the manufacturing sector was at its worst since 2001, although price pressures were at their strongest in more than 18 years.
"It looks as though stable rates are here to stay for several more months," said James Knightley, an economist at ING.