Bank minutes fuel hopes of rate cuts

The Bank of England's Monetary Policy Committee signalled yesterday that the next move in interest rates could be down, sending the pound tumbling.

The Bank of England's Monetary Policy Committee signalled yesterday that the next move in interest rates could be down, sending the pound tumbling.

It debated a possible cut for the first time in 16 months at its meeting on 9 December, fuelling speculation that the new year could usher in a new interest rates policy.

The MPC unanimously decided to keep rates unchanged at 4.75 per cent - for the eighth month in the row - the minutes of its meeting have shown.

The pound fell sharply, hitting a three-week low of 69.94p against the euro. It slipped to a nine-day low against the dollar at 1.9144, extending the week's declines in the wake of a raft of weak housing market data.

Alan Clarke, at BNP Paribas, said: "Overall, the impression is that if the MPC is considering a rate move it will be down rather than up. It's significant because last week was so positive for UK data." Rob Carnell, at ING, said the minutes suggested "an easing bias is emerging" for the first time since August 2003.

The minutes showed the MPC was worried about recent weaker-than-expected growth in the eurozone and Japan. Further weakness in UK manufacturing and the deflationary impact of a strong pound were also highlighted as concerns. They said: "For some members, the news was balanced and no change in interest rates was appropriate. For others, the downside risks to the inflation projection had increased, but not enough to make a persuasive case for a reduction in interest rates."

Economists were surprised by the dovish tone struck by the MPC, which brushed aside November's unexpected jump in CPI to 1.5 per cent.

Philip Shaw, at Investec, said: "Interestingly, this view [that the next move may be down] may well extend beyond simply one or two isolated doves." He said the fact that the committee's nine members were not more bothered about the inflation figures was "a mindset almost hinting at a personality transformation". Kate Barker and Marian Bell were tipped as the two members most likely to have discussed cutting rates.

The MPC noted there was a greater risk of world economic activity slowing down than it had seen in the November inflation report despite the fall in oil prices.

Given that last week saw surprisingly robust retail sales figures, an increase in earnings growth and a further fall in unemployment, analysts said it may take softer news on the domestic front to convince a majority of members to call for the first rates cut since July 2003.

There was a further boost from official figures showing that business investment in the third quarter was stronger than first reported. Business investment in Britain rose by a revised 1.0 per cent in the third quarter from the previous quarter, stronger than the 0.1 per cent gain reported a month ago. The revision took the annual gain to 5.3 per cent.

Martin McMahon, at Lombard Street Research, said: "The corporate sector remains more than willing to invest, a trend that is expected to persist into 2005 as well."