Bank discussed rate rise, minutes show

The Bank of England's monetary policy committee (MPC) discussed raising rates but voted 8-1 to keep them steady at 3.75% in March, minutes showed today.

For the first time in months, the MPC talked of the possibility of raising rates because of a surge in inflation that had pushed the underlying rate, which excludes volatile mortgage payments, to 3% since the MPC met on March 5 and 6.

The minutes said that for some members the decision to keep rates at 3.75%, rather than increasing them to 4%, had been "finely balanced". While the MPC blamed the recent surge in inflation on temporary factors, analysts thought the discussion on raising rates significant.

"Overall, the minutes are of note because inflation is back on their radar screens," said John Butler of HSBC." We would argue this set of minutes suggests an April rate cut is unlikely ... We still expect rates to remain at 3.75% by the end of the year (falling to 3% through 2004) but there still remains a substantial risk of a cut ahead of the inflation report in May."

Christopher Allsopp bucked the trend by voting for yet another quarter-point cut in borrowing costs, one month after the Bank caught the City unawares by lowering rates to a 48-year low. But the minutes said that most of his colleagues feared that a further reduction in rates might stoke inflation, which the MPC already expected to rise temporarily above its 2.5% target, set by the Treasury.

"It was very important that inflation expectations should remain anchored to 2.5%. A further reduction in rates so soon, at a time when underlying inflation was likely temporarily to rise further above the target, might dislodge that target," the MPC minutes said.

In addition, the outlook for UK demand might be affected by the Budget next month and it would be "sensible" to wait for new information it might contain about taxes, minutes said.

Committee members agreed that the prospect for the world economy was for a slow recovery. They said that the possibility of war with Iraq had increased uncertainty in the short run, but it was unclear yet what effect that would have on global economic activity.

In the UK, the MPC saw growing evidence of a consumer slowdown coupled with a cooling in house prices.

"Combined with the depreciation of sterling over the past month, this held out the encouraging possibility of a rebalancing of demand and activity within the economy, and - so far, at least - without the sharp adjustment that had often accompanied retrenchment in the past," the MPC said.

The Bank of England has played down fears of a crash in house prices and a collapse in demand by arguing that as long as unemployment - which hit a two-year low today - stays low, along with interest rates, then those worries will not materialise.