MPC was 'split' over rate decision

An interest rate increase was ruled out this month because of the risk that it might make the economic downturn "unnecessarily deep."

Monetary Policy Committee (MPC) member Tim Besley voted to increase the cost of borrowing by 0.25 per cent to 5.25 per cent, the Bank of England minutes for this month's meeting showed.

It was the second month in a row Mr Besley argued for a rate hike.

But seven members chose to keep the rate steady at 5 per cent, saying that despite the fact that the economic outlook had continued to worsen, it was the best policy to bring inflation back to its 2 per cent target.

The other committee member, David Blanchflower, voted for a rate cut.

The minutes said members were worried an unexpected rate rise might adversely affect business and consumer confidence, adding to downside pressures on activity and causing inflation to undershoot its target over the medium term.

Although rates could be cut be later, the downturn would be "unnecessarily deep, adding to the volatility in the economy."

In pressing for a rate cut, Professor Blanchflower argued the inflation risk was offset by the impact of a rapidly slowing economy.

The majority of members said the main risk of an immediate rate cut was that it could suggest the committee was more concerned about sustaining output growth than about returning inflation to the 2 per cent target.

Inflation hit 4.4 per cent in August and is expected to reach 5 per cent before the year end thanks to soaring food and energy prices.

Bank of England governor Mervyn King also warned last week that the UK economy faced at least one quarter of negative growth.

Jonathan Loynes, of Capital Economics, said the minutes showed the interest rate debate remained finely balanced.

He added: "There is little here to suggest that other members are about to join Blanchflower in voting for a cut in the very near future.

"Nonetheless, with inflation close to a peak and the economy heading towards recession, we still think rates could be falling by the year end and will eventually drop much further than the markets expect."

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