Market woes prompted Bank rate decision

Increased market nervousness and existing imbalances in the US economy prompted the Bank of England's monetary policy committee (MPC) to vote overwhelmingly to leave interest rates unchanged last month, bank minutes showed today.

As in May, only the Bank of England's deputy governor, Mervyn King, voted in favour of an 0.25% rise in rates, currently at 4%. While uncertainty remained over the strength of the global recovery, particularly in the US, the bank noted that plunging share prices had added to the "downside risks". The vote was 8-1.

Those downside risks were starkly underlined on Monday, when the FTSE 100 index of leading British companies suffered its worst percentage loss since September 11, shedding 5.4%.

Today, the index was up 170 points or 4.2% at 4,192.4 on the back of solid results from car giant Ford, as well as Citigroup in the financial sector and Coca Cola, the soft drinks company. But markets have slid steadily since the bursting of the hi-tech bubble in early 2000.

The fall in share prices has been especially sharp in the last few months with public confidence hammered by a wave of financial scandals in the US from Enron to WorldCom. "There was a risk that confidence could be further damaged if more cases of misreporting emerged," bank minutes said.

The June vote was the eighth month running in which the MPC decided to leave rates at a 38-year low, despite concern over the continued boom in house prices. Unease was also voiced, presumably most strongly by Mr King, that by the time that global recovery was clearly established, it might be too late to restrain the consequences for UK inflation.

Yet as this week's economic figures showed, the underlying rate of inflation, which excludes volatile mortgage interest payments, fell to 1.5% last month - its lowest level on record. With inflation well under control, Mr King would appear to be increasingly isolated in his call for a pre-emptive strike against future inflation.

At the beginning of the year, a summer rate rise looked well on the cards, given the boom in house prices and strong consumer spending. But high street sales are showing signs of hitting a plateau, while bank minutes argued that recent sharp falls in share prices might affect both consumption and investment - although it was too early to tell.

City analysts are now pushing back the prospect of an interest rate rise to the end of the year, allowing homeowners to enjoy more months of low interest payments.

Mark Miller, UK economist at Morgan Stanley, told Reuters: "[It was] maybe a slight surprise that Mervyn King didn't withdraw his 25 basis points rate rise recommendation. There are still economic arguments for raising rates later this year. But obviously stock markets have fallen since the July meeting and my view is that rates will stay on hold in August."