Bank of England Splits Three Ways in Rate-Cut Vote
Bank of England policy makers had the first three-way split in almost two years as they lowered the main rate this month, with David Blanchflower voting for a bigger cut and Andrew Sentance and Timothy Besley wanting no change.
The majority of the nine-member Monetary Policy Committee decided to cut the interest rate by a quarter-point to 5 percent “to offset, partly but not wholly, the current and prospective downward shift in demand arising from the deterioration in global credit conditions,'' minutes of the April 10 decision showed.
Governor Mervyn King says the central bank faces a “difficult balancing act'' as it tries to damp inflation while thawing the frozen mortgage market shore up the slumping housing market. The split highlights the discord on the panel about the pace of further interest-rate cuts after three since December.
“The minutes suggest to us that eight of the nine members remained in favor of a gradual approach to policy easing, reflecting the negative outlook for inflation for this year,'' said Nick Kounis, an economist at Fortis Bank NV in Amsterdam and a former U.K. Treasury official. “The BOE's next move will be a 25-basis point reduction in June.''
The pound was little changed against the dollar, trading at $1.9995 as of 12:13 p.m. in London. U.K. mortgage approvals fell 46 percent in March from a year earlier, the biggest drop since September 1997, the British Bankers' Association said today in a separate report.
The Bank of England will publish quarterly economic forecasts on May 14. Policy makers last split three ways in May 2006, when they left the rate unchanged as David Walton voted for an increase and Stephen Nickell favored a reduction.
Inflation Concern
Blanchflower, wanting a half-point cut, said the bank should “look through the near-term increase in inflation, which was likely to be short-lived.'' Besley and Sentance said that “it was likely that bank rate would need to be reduced at a measured pace, but recent economic news did not justify a reduction.''
The U.K.'s inflation rate may stay at or exceed the government's 3 percent limit for five months starting in July, Barclays Capital economist George Johns said yesterday. Consumer prices rose 2.5 percent in March from a year earlier. The price of oil rose to a record above $119 yesterday.
Chief Economist Charles Bean said on April 18 that a “dislocation in credit markets has worsened'' while price pressures have “intensified.'' King said March 31 that those factors mean the bank faces a “difficult balancing act.'' Deputy Governor Rachel Lomax said last year the situation is a “dilemma'' for policy makers free credit report.com same day payday loans.
Weaker Pound
The minutes showed central bankers are concerned a weaker pound will fan inflation. The pound has dropped 11 percent since July against the currencies Britain's major trading partners and reached a record low of 80.99 pence per euro on April 16.
Annual price gains of 3.1 percent or higher would force the governor to write an open letter of explanation to the government, which happened in April last year for the first time in the bank's past decade of setting interest rates.
Besley said in a speech yesterday that the bank must stay focused on its mandate to keep inflation at 2 percent.
The Bank of England said April 21 it will swap home-loan securities for government bonds in a bid to kick-start mortgage lending, which seized up after the collapse of the U.S. subprime mortgage market. King pledged to meet demand for the plan even if it exceeds an estimate of 50 billion pounds ($100 billion).
Slower Growth
The credit squeeze prompted the International Monetary Fund to forecast U.K. growth of 1.6 percent in 2008, the least since the end of the last recession 16 years ago.
There is an “increased downside risk'' to residential investment and consumer spending, as the supply of credit has deteriorated further, the minutes said. Mortgage lenders including HBOS Plc have raised the cost of their loans even after the central bank lowered the benchmark rate by 0.75 percentage point.
Policy makers said that mortgage arrears and possessions are still low and employment has been rising. Retail sales data show consumer spending has been more resilient than expected, the minutes said.
“The tone of the data wasn't all weak,'' said George Buckley, an economist Deutsche Bank AG in London, who forecast the possibility of a three-way split before the release of the minutes. “Had markets not been in turmoil and rate cuts were being passed on, the bank would have been tempted to leave rates on hold.''
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