BOE Panel Split Three Ways in Vote to Keep Rate at 5%

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By Svenja O'Donnell and Brian Swint

Aug. 20 (Bloomberg) -- Bank of England policy makers split three ways in August, with one arguing for higher rates to tame inflation and another voting for a cut to stave off a recession.

Governor Mervyn King and the six other members of the Monetary Policy Committee held sway in the decision to keep the benchmark rate at 5 percent, minutes of the Aug. 7 decision showed today. Timothy Besley voted for a rate increase, saying a ``pre-emptive'' move would help anchor inflation expectations. David Blanchflower called for a cut after the bank cut growth forecasts. It was the second such split in as many months.

``It's unlikely the bank will reach a consensus in the next few months,'' Lena Komileva, an economist at Tullett Prebon in London, said in an interview on Bloomberg Television. ``The Bank of England realizes it will have to act late to avoid wage cost spiral, but this is at the expense of growth.''

King has said the economy faces a ``difficult and painful adjustment'' this year, with slowing growth and rising consumer prices. While Britain is edging closer to its first contraction since the early 1990s, inflation accelerated last month to more than double the central bank's 2 percent target.

The pound fell to $1.8572 as of 11:50 a.m. in London from $1.8658 yesterday. The currency has declined 6 percent against the dollar this month as investors increased bets on rate cuts.

Manufacturing, Money Growth

King said last week that economic growth will be ``broadly flat'' over the next few quarters and declined to rule out a recession. U.K. factories have the lowest expectations for output growth since 2001, a survey by the Confederation of British Industry showed today.

Other reports suggest that the economy may still be holding up. U.K. money supply growth slowed less than economists forecast in July, Bank of England data showed today. M4, measuring currency in circulation and deposits at banks, rose 0.9 percent in July after climbing 1.8 percent in June. Economists expected 0.5 percent, according to the median of 11 forecasts in a Bloomberg News survey.

Gross mortgage lending rose 5 percent in July from June to 24.8 billion pounds ($46 billion), the Council of Mortgage Lenders said today.

``Most members of the Committee judged that the current stance of monetary policy was broadly appropriate,'' minutes of the meeting published today showed. ``The outlook for activity growth had continued to worsen, but some build up in the margin of spare capacity was likely to be necessary to ensure that inflation returned to the target.''

Inflation Rate

King, presenting the bank's quarterly forecasts on Aug. 13, said that inflation will reach about 5 percent in the coming months and may slow to below the central bank's 2 percent target in two years if the benchmark rate remains unchanged. Consumer prices rose 4.4 percent in July from a year earlier.

Slower growth and faster inflation have hurt Prime Minister Gordon Brown's popularity. Britain's government budget surplus shrank in July to the lowest since 2005 as the economic slump sapped tax receipts.

The minutes today suggest the Bank of England isn't yet ready to bolster the economy with lower interest rates. Policy makers considered raising and cutting rates at this month's meeting.

A reduction ``might not send an inflationary signal'' if the economy slowed enough, though it would also create the risk of faster inflation, the minutes showed. A rate increase may have unnecessarily hurt growth.

``We may see a split for a while longer, but it's going to become more and more obvious they will have to cut, and we will move toward a two-way split,'' said George Buckley, an economist at Deutsche Bank AG in London.

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net. Brian Swint in Berlin at bswint@bloomberg.net
Last Updated: August 20, 2008 06:53 EDT