Rate cut hopes rise after Bank doves flap their wings

The chances of a cut in interest rates next month rose sharply yesterday after it emerged three members of the Monetary Policy Committee unexpectedly voted for a reduction two weeks ago.

It was the first time anyone at the Bank of England had voted for a cut since February and the split took the financial markets by surprise.

But divisions within the MPC only added to market uncertainty. The Confederation of British Industry said a half-point cut would be needed if the outlook deteriorated, while a leading think-tank said even a quarter-point cut would be a mistake.

The minutes of the meeting showed Christopher Allsopp, Kate Barker and Steven Nickell wanted to cut rates to 3.75 from 4.0 per cent.

The 6-3 vote could have been even closer as one member who a month earlier was worried about a slump in consumer spending said they were reassured by recent figures.

The nine-strong committee agreed the key issue was whether monetary policy should be used as a "further stimulus to domestic demand in the face of continuing slow growth in external demand".

The three dissenters said the world economy had performed worse than expected while stock markets had fallen and sterling's exchange rate had risen. "The downside risks to the outlook had increased," they said. "Without a pre-emptive reduction, domestic demand might fall faster than currently envisaged, leaving inlation below target for longer."

But the majority, which included all five Bank officials on the MPC, said they wanted to wait for the review of the data carried out for its November Inflation Report. They said the economy was already growing close to potential while domestic demand was resilient.

They warned a rate cut would deliver further rises in house prices, personal borrowing and spending, which are all close to record levels.

They said inflation was already forecast to overshoot its target in two years' time, hinting it could even be revised upwards in light of recent news.

The committee agreed the first estimate of growth in the latest quarter, published tomorrow, would give a clearer picture.

Further ammunition for a cut came from a CBI survey showing orders had fallen to a three-year low over the summer. Output also fell, reversing a recent return to growth, while confidence slipped for the first time since January.

The CBI refrained from calling for an immediate rate cut, saying it would not be "helpful" if the Bank cut rates only to hike them shortly afterwards.

But Doug Godden, its head of economic analysis, said: "If economic conditions continue to weaken over the next few months, CBI members would look for a decisive cut of half a percentage point."

However, Martin Weale, the director of the National Institute of Economic and Social Research, said the stock markets' recovery had lessened pressures for a cut. "I think that even if stock markets had not recovered by the time they met [in November] we would still be saying there was no case for a change," he said.

Economists say November is a close call. Ross Walker, at Royal Bank of Scotland, said consumer nervousness or a faltering global recovery could swing two members towards a cut.