MPC vote lifts expectations of early rate cut

An April cut in UK interest rates looked increasingly likely yesterday, although still far from certain, after Monetary Policy Committee minutes highlighted worries about credit market turmoil and revealed two members pushed unsuccessfully for an immediate reduction this month.

Minutes of the nine-strong Bank of England committee's March 5 and 6 meeting, as well as revealing Bank deputy governor Sir John Gieve had joined MPC colleague David Blanchflower in pushing for an immediate cut, emphasised rate-setters' keen attention to the impact of credit market conditions on growth.

Credit woes have intensified since, with wholesale money markets tightening even further in the two weeks since this meeting.

The British Bankers' Association's London Interbank Offered Rate for three-month sterling rose further yesterday, from 5.9725% on Tuesday to a fresh 2008 high of 5.98%.

The minutes made it plain that the difference of opinion within the MPC was about the timing of the next rate cut rather than the need for one.

They state: "For the majority of members, despite some differences in their assessments of the risks, the balance of risks had not changed sufficiently to merit a change in Bank Rate this month."

The MPC has cut UK base rates by a quarter-point twice this cycle, on December 6 and February 7, to take them to 5.25%.

Yesterday's minutes signal it was the issue of consecutive monthly rate cuts which perturbed the majority particularly, in terms of potential impact on financial market views of how fast and far base rates might fall further out.

Laying out the thinking of the no-change camp on March 6, the minutes state: "Although the central view (that benchmark inflation will return to the 2% target two years out) was predicated on the assumption of some further modest easing of Bank Rate, back-to-back reductions might lead observers to think that the committee was focusing on downside risks to demand at the expense of the medium-term outlook for inflation. That, in turn could lead to an exaggerated response of the market yield curve to a rate reduction."

However, although the minutes and deteriorating financial market conditions have rekindled speculation about another rate cut next month, hawkish references to continuing inflationary pressures meant the City was not betting its shirt on the MPC moving as soon as April 10.

These inflationary pressures were highlighted again in a survey from the Confederation of British Industry yesterday, showing that UK manufacturers anticipate putting through big price hikes. On a more positive note from an economic viewpoint, the survey showed UK manufacturing in buoyant form amid the turbulence. Firms signalled they were as happy about the state of their export order books as they have been at any time since 1995, which may reflect a boost to demand from mainland Europe from sterling weakness against the euro.

Blanchflower, the MPC's arch-dove, had been expected to vote for a rate cut two weeks ago. However, even though Gieve had joined Blanchflower in voting unsuccessfully for a cut back in November in an identical seven-to-two vote in which the other committee members voted for no change, he had not been expected to have done so again two weeks ago.

Gieve's remit is financial stability and he is therefore likely to be acutely aware of the potential fall-out from credit market troubles.

Setting out Gieve and Blanchflower's case, the minutes state: "Some members saw the balance of risks differently (from the majority). The prospects for the US economy had deteriorated over the month; financial markets had taken a further turn for the worse and stressed conditions were expected to last for longer. This increased the downside risk to UK growth in the short term and to inflation further out.

"The reductions in interest rates since last summer had been offset by increases in market rates so the stance of policy might still be on the restrictive side of neutral. The evidence continued to point to the need for some reduction this spring, broadly in line with the market expectations embodied in the yield curve. The downside risks argued against delay so these members judged that a reduction in Bank Rate of 25 basis points was appropriate this month."

Sterling fell in the wake of the minutes, as financial markets anticipated further cuts in UK base rates on what was another turbulent day for banking stocks.

The pound was last night trading just above $1.98 - down about four cents on the day. Sterling was also weaker against the euro, with the single currency up about 0.6p on the day around 78.75p.