August rate cut likely as minutes reveal close vote

The chances of an interest rate cut in early August increased yesterday after the publication of minutes showing the Bank of England almost sanctioned a reduction this month on the day of the London bombings.

The minutes revealed that four of the Bank's nine-member monetary policy committee voted for an immediate cut in the face of slower spending and economic growth.

The pound fell to a four-month low against the euro yesterday on the foreign exchanges as financial markets anticipated a rate cut.

There had been speculation in the City that when the MPC announced its decision on rates on July 7 it may have been influenced by the London bombings that morning. But the MPC said yesterday that at the time of its meeting early that day, the extent of what had happened was unclear and so it based its decision purely on economic factors. Few economists expect the bombings to have any lasting impact on the economy.

The MPC raised interest rates five times between November 2003 and August last year to try to cool the housing market and the growth in consumer spending. The monetary medicine has been effective, said analysts, and growth, consumption and the housing market are all slowing rapidly.

For these reasons, argued the four - the chief economist, Charlie Bean, Kate Barker, Steve Nickell and a new committee member, David Walton, formerly a Goldman Sachs economist - there was no time to be wasted in cutting interest rates. "Early action would reduce the risk that greater changes in the policy rate would be needed at some point in the future," they said.

The MPC has won plaudits since it was set up by Labour in 1997 for being pre-emptive with its interest rate moves, as it has sought to keep inflation and economic growth on a smooth path. For the five members, including the Bank's governor, Mervyn King, who voted to hold rates steady, the main argument for waiting was to be able to properly analyse large revisions to official growth statistics within the August inflation report.

They also argued that as financial markets were already expecting a rate cut, fixed-rate mortgages had been getting cheaper, thus possibly helping the housing market and meaning the consumer slowdown might prove short-lived. A fall in the pound's value, potentially pushing import prices, and a rise in the stock market in June could add to inflationary pressures, they said.

But financial markets moved immediately to factor in a rate cut in August - the first reduction for two years - and one or two more during the rest of the year, meaning base rates could end the year at 4%.

"This is a dovish set of minutes, with sentiment based on a reaction to the economic information rather than a reaction to the London bombs," said John Butler, UK economist at HSBC. "We now believe the MPC will cut in August and wait to see the implications."

There were signs yesterday that consumers may already be responding to the fall in fixed-rate mortgages as mortgage demand rose last month both in terms of money lent and new loan approvals.