BoE MPC voted 7-2 to keep rates steady at 5.25 pct UPDATE

Wed, Mar 19 2008, 10:29 GMT
http://www.afxnews.com

(Updates with further details)

LONDON (Thomson Financial) - Bank of England rate setters voted 7-2 to keep interest rates on hold at 5.25 pct on March 6, with deputy governor John Gieve and arch-dove David Blanchflower calling for a quarter point reduction.

The split was bigger than analysts had expected. They were penciling in an 8-1 vote with Blanchflower the sole dissenter.

At the March meeting, the majority of the Monetary Policy Committee members said the balance of risks since the last meeting have not changed sufficiently to merit a change in the Bank Rate this month.

The seven members, which included governor Mervyn King, said that though their central view assumes there will be further reductions in interest rates, a back-to-back cut following February's 25 basis-point reduction "might lead observers to think that the Committee was focusing on downside risks to demand at the expense of the medium-term outlook for inflation".

They said there was little evidence that the downside risks to inflation from a sharper-than-expected slowdown in activity, which had been flagged as a risk in February's Inflation Report, had begun to crystallise.

Evidence on long-term inflation expectations remains mixed, they added.

However, Gieve and Blanchflower saw the balance of risks differently, saying the prospects for the US economy had deteriorated since last month, that financial markets had taken a further turn for the worse, and that conditions are expected to remain this way for longer.

"This increased the downside risk to UK growth in the short term and to inflation further out," they said.

The doves added that though there are increasing inflationary pressures from oil and commodity prices in the short term, "there was no sign that this was likely to feed through to wage settlements".

Moreover, they said recent surveys by BoE Agents have confirmed the pressures on firms not to pass through cost increases to consumers.

In fact, the MPC majority agreed that though CPI inflation is likely to rise "quite sharply in the coming months", the economy appeared most likely to be roughly on track for CPI to return to its target of around 2 pct in the medium term.

The two doves also said the reductions in interest rates since last summer have been offset by increases in market rates so the stance of policy might still be on the restrictive side of neutral.

Sterling markets had been pricing in the likelihood that the next interest rate cut will happen in May, when it has its latest quarterly Inflation Report to hand, but there is an increasing risk that the BoE may cut next month instead due to the heightened financial market turmoil.

Markets reckon the base rate could fall to as low as 4.50 pct by the end of the year even though the annual CPI inflation rate is likely to rise sharply in the coming months, potentially breaching the 3.0 pct target that would require King to write to the Chancellor, Alistair Darling, to explain.

CPI hit 2.5 pct in February.

The prospects for sterling could be a further inflation threat.

The MPC said option prices on markets suggest that the risks to the sterling effective exchange rate were skewed to the downside.