Interest rates dissent revealed

Two members of the Bank of England's monetary policy committee (MPC) pressed for a cut in interest rates earlier this month, Bank minutes showed today.

Stephen Nickell and Christopher Allsopp voted for a quarter-point cut in base rates for the fourth month in a row in the MPC's January 8 and 9 meeting, but were outvoted by the other seven members, including Sir Edward George, the Bank's governor, and his deputy, Mervyn King.

In their meeting, MPC members voted to keep interest rates at 4% - their lowest level for nearly 40 years - for the 14th month in a row. The committee felt - contrary to some analysts - that consumer spending was not about to suffer a sharp slowdown, thereby removing a key prop to economic expansion.

"Output growth had recently been around trend, and there was no sign in the monetary or labour data that the economy was about to weaken abruptly, despite the gloomy tone of some commentators," the minutes said.

This relatively sanguine assessment contrasts with today's warning from the financial services authority (FSA), the financial watchdog, about the build-up of personal debt.

In an assessment of the year ahead, the FSA expressed its concern at the growing risk of a sudden retrenchment by consumers that could tip the economy into a sharp slowdown. The FSA estimated that 6.1 million families - about one-fifth of the population - are finding it "difficult" or "moderately difficult" to meet their debt repayments.

Analysts predicted no change in interest rates based on the latest minutes.

"Overall, the discussion at January's policy meeting was very similar to the previous meeting," said John Butler, an HSBC economist.

"The interesting additions were their increasing concerns about the German economy but lack of concern about either a sharp slowdown in UK consumer spending or the recent pick-up in underlying inflation. Overall, the minutes do little to change our opinion that rates are likely to remain at 4% throughout 2003."

Figures out yesterday showed that underlying inflation, which excludes mortgage costs, dropped back slightly last month to 2.7%, but remained above the MPC's 2.5% target for the second month running.

The committee felt that, on balance, the news from the global economy was probably slightly weaker, particularly from Germany. Recent data showed that Europe's largest economy grew only 0.2% in 2002 from the previous year and some analysts believe that Germany might tip into recession this year.

"Some committee members remained concerned that weak confidence in Germany might begin to spill over to other countries in the euro area," the minutes said.

On the plus side, the committee thought better news was coming out of America, where manufacturing production had risen in November, coupled with an unexpectedly large rise in a survey of confidence in manufacturing from the Institute for Supply Management. On the other hand, the MPC noted only limited signs of a pick-up in investment growth.

On the rising threat of war, the MPC said the effects of current political tensions were unclear, but they might have the effect of dampening confidence and perhaps demand in the UK and the rest of the world.

Arguing for an interest rate cut, Mr Nickell and Mr Allsopp cited significant downside risks from the eurozone area, where consumer confidence was weak, whereas the upside risks in inflation were modest, with unemployment low, and consumption and house price increases moderating.

"Overall, the stalemate among members is set to continue with no move in rates," Mr Butler said.