The Bank of England's Monetary Policy Committee weighed arguments for cutting, raising and holding benchmark UK interest rates before deciding to stand pat at 5% two weeks ago, minutes reveal.

The Bank of England's Monetary Policy Committee weighed arguments for cutting, raising and holding benchmark UK interest rates before deciding to stand pat at 5% two weeks ago, minutes of its August 6 and 7 meeting reveal.

Yesterday's minutes appear to leave the door open for a rate cut towards the end of this year, while not signalling any imminent move to ease borrowing costs as fears of UK recession mount.

MPC members, the minutes reveal, considered two weeks ago that "a case could be made for an immediate increase, for a cut, or for maintaining Bank Rate at the current level".

The minutes show that MPC members considered that ongoing tightening of credit market conditions meant that any inference that monetary policy was loose, because real base rates were low by historical standards, "might be misleading".

Setting out MPC members' views of the developing situation, and seemingly signalling growing worries that economic weakness could drag inflation below target two years out, the minutes state: "Over the past month, however, while the activity news had continued to worsen, the news on the near-term inflation outlook had been more mixed."

The minutes also highlight MPC members' expectation that even the weak 0.2% growth in the second quarter could be revised lower given recent industrial production data, and the committee's belief that recent survey evidence points to "further slowdown" in the three months to September.

MPC members, at their meeting two weeks ago, also acknowledged the sharp fall in UK house prices in July and weak activity in the residential property market, as well as a seeming slowdown in retail sales growth, a weakening labour market and muted pay pressures.

The minutes even make mention of a decline in long-term inflation expectations in Citigroup and YouGov's July survey to the levels of a year earlier, and highlight a 15% fall in the oil price in the month leading up to the MPC's August meeting.

Seven of the nine MPC members, including Bank of England Governor Mervyn King, voted to hold base rates at 5% two weeks ago. Hawk Tim Besley voted unsuccessfully for a quarter-point rise, while dove David Blanch-flower continued to push in vain for a cut of the same magnitude. The seven-one-one split was identical to that in July.

Mulling the stance of monetary policy, the minutes state: "The committee discussed monetary conditions at the current juncture. Estimates of real interest rates, based on the difference between Bank Rate and consumer price inflation rates, were low when compared with historical averages, apparently implying that monetary conditions were loose.

"But there were a number of reasons for thinking that this inference might be misleading. Rates on bank borrowing for much of the private sector had risen relative to Bank Rate over the previous year. And restrictions on the supply of credit meant that the effective interest rate facing some potential borrowers was even higher. For example, although some mortgage rates had fallen on the month, lending criteria, such as maxi-mum loan-to-value ratios, had been tightening, implying that most borrowers required substantial deposits to access the mortgage market."

The minutes add: "In these circumstances, committee members noted that it was instructive to look at the quantity, as well as the price indicators. Three-month annualised growth in lending to individuals had slowed to around 5% in the second quarter, from twice that rate a year earlier."

The MPC considered at the meeting the projections in its latest quarterly inflation report, which was made public on Wednesday last week. Its latest projections have benchmark annual UK consumer prices index inflation peaking around or above 5% in coming months but falling below its 2% target by its two-year time horizon, although with the risks seen to the upside.

On the growth front, the MPC projects UK economic output will stagnate "over the next year or so".

King, acknowledging the danger of recession, last week highlighted the "possibility of a quarter or two of negative growth". Economists are now attaching a median probability of 45% to UK recession, defined as two consecutive quarters of contraction of gross domestic product.

The minutes set out the "arguments in favour and against" cutting, raising, and holding rates and the "identifiable risks" attached to each of the three options.

Setting out MPC members' view of the implications of an increase in rates, the minutes state: "An immediate rise in Bank Rate would send a strong signal to wage and price-setters that the committee would not allow above-target inflation to persist in the medium term.

"If pay growth could be kept at a moderate level, that would help constrain the likely rise in unemployment as growth slowed."

However, the minutes add: "The main risk would be that an unexpected rate rise might adversely affect business and consumer confidence, adding to the near-term downside pressures on activity and causing a material undershoot of the inflation target in the medium term. Although rates could be cut later in that event, the downturn would be unnecessarily deep, adding to the volatility in the economy."

Setting out the case for a reduction in base rates, the minutes state: "An immediate cut in Bank Rate would help to ameliorate the worst of the downturn in activity and reduce the risk of materially undershooting the inflation target in the medium term. A cut might not send an inflationary signal if there was sufficient slowing in the economy to bring inflation back to the target."

However, reflecting MPC members' views that people must accept falls in real take-home pay to avoid fuelling inflation and a greater-than-otherwise rise in unemployment, the minutes add: "The main risk associated with an immediate cut was that it could cause wage and price-setters to conclude that the committee were more concerned about sustaining output growth than about returning inflation to the target. In that case, the risk of elevated inflation persisting, and perhaps rising further, would increase. In the longer run, Bank Rate might then need to be raised further than otherwise in order to bring inflation back to the target, with the attendant costs in lower activity."

Setting out the reasons for standing pat, the minutes state: "The third possible decision was to maintain Bank Rate at its existing level. Given the current stance of monetary policy and the prospective weakness in the economy, the resulting increase in spare capacity should bear down on inflation. That would help to counter the risk of high inflation in the near term becoming embedded in inflation expectations, and to bring inflation back to the target."

Confirming that the MPC saw risks even in not doing anything on rates, the minutes add: "There would, however, still be significant risks to the inflation outlook (by maintaining base rates)."

The MPC cut base rates by a quarter-point three times between December and April, and has held them since as growth has slowed sharply and inflation has surged. Benchmark inflation hit 4.4% in July.

Detailing the rationale of the seven MPC members voting for no change in base rates two weeks ago, the minutes state: "Most members of the committee judged that the current stance of monetary policy was broadly appropriate Inflation was likely to move further above the target in the coming months. The outlook for activity growth had continued to worsen, but some build-up in the margin of spare capacity was likely to be necessary to ensure that inflation returned to the target in the medium term."

Setting out Besley's views, the minutes state: "For one member of the committee, the risk of inflation being more persistent than in the central projection was sufficient to warrant an immediate increase in Bank Rate. Although there were considerable downside risks to growth, particularly those arising from the tightening of credit conditions, a pre-emptive increase in Bank Rate would help to keep inflation expectations anchored to the target and lessen the need for more restrictive policy in the future."

Detailing Blanchflower's case, the minutes state: "For another member, the downside risks to activity growth were greater than the majority view expressed in the inflation report.

"For this member, there was less risk of inflation being persistent and more risk of undershooting the inflation target in the medium term, because of rapidly slowing activity, so an immediate cut in Bank Rate was warranted."