Bank deputy governor voted for rate rise

The Bank of England's monetary policy committee (MPC) voted 7-1 to leave interest rates unchanged in June because of the still uncertain economic outlook, Bank minutes disclosed today.

But the eight MPC members said that a fall in the pound, which puts pressure on prices, and greater than expected strength in consumer spending, had brought forward the time for higher rates.

In voting for a quarter-point rise last month, the Bank of England deputy governor, Mervyn King, signalled the change of mood on the MPC from the previous month. In May, the MPC had voted unanimously to keep rates at their 38-year low of 4%.

Some economists had expected the Bank to start taking pre-emptive action as soon as July, but this week's surprisingly weak inflation numbers have bought the Bank some more time. The rate excluding mortgage interest payments fell in May from 2.3% to 1.8%, its lowest level on record. That will make it difficult for the Bank to raise rates, especially as manufacturing is just coming out of its worst slump in a decade.

In the minutes for the June 5-6 meeting, the Bank acknowledged the lack of inflationary pressure.

"Most members felt that, given the outlook for inflation, which on the central projection was expected to remain below or close to target for some time, it was not yet necessary to increase interest rates," the minutes said.

But Mr King, the lone dissenter, argued that while the near-term inflation outlook remained tame, updated projections would put inflation close to 3% in two years' time, well above the government's 2.5% target.

"Given the fall in the exchange rate, a modest rise in interest rates now would help to rebalance the economy," the minutes implied Mr King had argued at the meeting.

"It might also provide a useful signal, to consumers and to house buyers, which could reduce the extent to which interest rates might ultimately need to rise."

But as in May, worries over the strength of the global recovery overrode inflationary fears and the MPC kept rates unchanged for the seventh month running.

In addition, the Bank noted the following: that the signs of UK economic strength lay in surveys rather than official data; that uncertainty surrounded estimates for first quarter growth; that it was too soon to tell how a falling pound would affect inflation; and that falling oil and equity prices would act as a brake on inflationary pressures.