Minutes Expose Bank's Rate-Setting Split

Economists at the Bank of England were divided as to whether to lower, raise or keep the base rate of interest as it was at their last meeting, it emerged today.

Minutes of June's meeting of the nine-member Monetary Policy Committee (MPC) show that seven supported a rate hold at its current level of five percent, while one member voted for a rise and another for a cut. Interest rate decisions affect the repayment costs of variable rate loans, with rises making them more expensive and reductions making them cheaper.

Currently, the central bank is faced with a rates-setting dilemma, due to unusual economic conditions. The UK is currently feeling the effects of an economic slowdown, due in part to the credit crunch; however, despite the fact that such slowdowns generally lead to depressed prices, inflation is continuing to rise due to unusually high wholesale food and fuel costs.

These contradictory pressures have made the Bank's job much harder than the usual policy of merely cutting rates as the economy slows - and the MPC experts' differing views on how to deal with the problem is exposed by this three-way split.

The minutes themselves also hinted at the difficulty the MPC had in reaching a decision last month. "An increase in base rate in the current circumstances when confidence was low and the financial sector fragile could impart a downward momentum to the economy that risked a significant undershoot of inflation in the medium term," they said.

"Keeping bank rate at five percent when the economy was slowing was arguably already sending a strong signal of the MPC's commitment to reducing inflation."