Bank came close to rates cut

The Bank of England came within a whisker of lowering interest rates earlier this month, lending weight to City expectations that a cut will come next month.

Minutes of the Bank's monetary policy committee July 6 and 7 meeting - when borrowing costs were left at 4.75% for the 11th month running - showed that of its nine members, Kate Barker, Stephen Nickell, Charles Bean and new member David Walton wanted a cut. In June, two MPC members voted for lower rates.

The minutes said that towards the end of policy meeting, the committee was informed of a series of explosions in central London but no further reliable information was available at the time.

"The decision on interest rates was reached solely on the economic merits, and no committee member argued that it should be altered to reflect unfolding events," the minutes said.

The four who favoured a cut said early action would reduce the risk that greater changes in the policy rate would be needed at some point in the future. They argued that a cut was justified on the grounds that prospects for economic growth looked weaker, while high levels of household debt had increased the risk that the consumer slowdown could be protracted.

But the majority preferred to wait for the August inflation report to get a clearer picture of growth prospects. For them "more generally, it was unclear how deep and persistent the consumer slowdown would prove to be".

Consumers started to rein in spending at the end of last year. The Confederation of British Industry said last month that retail sales in June had fallen at their sharpest rate for 22 years, and retailers have been issuing a steady stream of gloomy updates about the "challenging" high street conditions.

But those who favoured a wait-and-see policy can point to today's lending figures, which indicate borrowing is continuing at a steady pace. The British Bankers' Association said mortgage lending rose £4.6bn in June, a gain of £0.1bn from May, while credit card borrowing increased by £295m.

Still, most analysts believe that a cut in rates in August is very much on the cards.

"The overall tone of the minutes is actually a little less dovish than might have been expected, but with four members of the MPC voting for lower interest rates this month, a 25 basis point cut in August still seems highly probable," said Howard Archer, the chief UK economist at consultancy Global Insight.

"We expect rates to be down to 4.25% by the end of this year and 4% in the first quarter of 2006 as further below-trend growth and a softer labour market eases inflationary concerns and pressures."