MPC was 'split' over rate decision

The majority of the Bank of England rate-setters voted to keep rates on hold but one voted for a cut, another for a rise.

Monetary Policy Committee (MPC) member Tim Besley voted to raise interest rates by 0.25 per cent, a move he said was necessary to "ensure the committee's credibility" in the battle against inflation, which is currently at 3.8 per cent.

Seven other members of the MPC, including Governor Mervyn King, voted to hold rates at 5 per cent at the meeting two weeks ago, while Professor David Blanchflower argued for a 0.25 per cent cut.

It was the first three-way split on rate direction since May 2006 with Mr Besley's increase vote the first since July last year.

In a sign of the increasingly difficult balancing act being performed by policymakers, the minutes of the meeting recorded that for all committee members the decision to keep rates steady was a "difficult one".

The dilemma was highlighted by a survey from the Confederation of British Industry which showed more manufacturers were expecting to put prices up than at any time in the past 18 years, while for the first time in at least a year more firms also expected their volume of output to decrease over the coming months.

MPC members discussed whether raising interest rates could send "a strong signal" that it was focusing on inflation and remained determined to bring it back to target in the medium term.

ING economist James Knightley said the report reinforced his view that rates would remain on hold for several more months.

He added: "We doubt that rates will be raised given the weak economic backdrop, as highlighted by a new record low in mortgage approvals today, while the plunge in oil prices is also favourable for a lower inflation outlook.

"Consequently, we see rates at 5 per cent until year-end with rates being cut to 3.5 per cent by the third quarter of 2009."

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