Another cut in UK borrowing costs 'less likely'

Another cut in borrowing costs in Britain looked less likely today after it was revealed this month's move to cut interest rates divided Bank of England members.

Minutes from a dramatic meeting two weeks ago show the Bank's Governor was defeated for the first time in the eight years of the rate-setting Monetary Policy Committee (MPC).

Mervyn King was among four members, including his two deputies, who lobbied against a cut in rates to 4.5%, but was outvoted by the other five members, who included the Bank's chief economist Charles Bean.

While both camps recognised the case for a cut in rates to stimulate sluggish economic and consumer growth, Mr King and others argued the timing was not ideal.

They said there was "little risk" in waiting for more data, particularly given the "difficulty" the committee would face later if they had to reverse the first cut in interest rates in two years.

Those members pressing for the cut said a failure to reduce rates would damage confidence and added that the move could be reversed if needed.

Signs that this month's cut may be a one-off were reinforced by the whole committee last week when the Bank's quarterly inflation report said projections did not support the current view that a sequence of interest rate cuts was needed to meet the Government's inflation target of 2% in the medium term.

While the Bank cut its 2005 growth forecast from 2.5% to about 2%, it expected the rate to accelerate beyond 3% by 2007 - fuelling inflation concerns.

Investec chief economist Philip Shaw said the minutes and inflation report indicated another rate cut was unlikely this year.

He added: "The closeness of the vote was quite staggering, especially given this was the turn in the interest rate cycle following several rises.

"This should not dent the MPC's credibility - if anything quite the reverse. Interest rate policy is set by a nine person committee with individual responsibility, not just the Governor."

This month's vote was the second knife-edge decision by the Bank in a row after members voted 5-4 to keep the cost of borrowing on hold in July.

Mr King has voted against the majority of the committee in the past, but has never done so during his two years as Governor. It was the 100th meeting of the committee, which came into being in 1997.

HSBC economist John Butler's described today's report as a "key moment" in the committee's history and said it illustrated a major division in terms of the inflation outlook and on tactics.

He added: "The cutters are arguing one move should be enough, while the no-movers are unclear whether a cut will need to be reversed at some future date.

"At a minimum, this division suggests rates are unlikely to be cut in the near term, unless GDP growth disappoints, and given the Bank is expecting GDP growth of around 0.4% in the third quarter, the room for disappointment near term seems slim."