BoE rustled up 6-2 to keep rate intact

May 17 | Updated: May 18 2006, 05:30am hrs
The Bank of Englands policy-making committee voted 6-2 to keep the benchmark interest rate unchanged at 4.5% this month, with David Walton voting for an increase and Stephen Nickell backing a reduction.

Waltons vote for an increase was the first for a year, whereas Nickell voted for a sixth straight month to cut borrowing costs, according to the minutes of the May 3-4 meeting released in London on Wednesday. It was the first time the committee was split this way since August 1998, the bank said.

Investors have abandoned bets on a rate reduction and are now predicting an increase as no policy makers have joined Nickell since December and the economy had picked up. The central bank also suggested last week the next move in rates would be up by raising its forecast for inflation this year.

On balance, most members felt there was no need to stimulate demand at this time given the signs of a pick-up in growth and the near-term risks to inflation from higher energy prices, the minutes said. Equally, there appeared to be no pressing need to tighten policy given the continued weakness of domestically-generated inflation. Only one of 19 economists in a Bloomberg News survey expected the vote to be split this way.

The implied rate on the interest-rate futures contract maturing in September rose three basis points to 4.92% after the report as of 10 a.m. The contract settles to the three-month London inter-bank offered rate for the pound, which has averaged about 15 basis points more than the central banks benchmark for the past decade. A basis point is 0.01 percentage point. The pound rose against the dollar to $1.8983 from $1.8954 before the report.

The fact that markets were expecting an unchanged 7-1 vote certainly means that the vote will ruffle markets, said Gavin Redknap, an economist at Standard Chartered Bank in London. Nevertheless, the fact that Walton was the lone voice to call for a hike suggests the bank has no strategy for hiking rates any time soon.

The economy grew 0.6% in the first quarter, matching the pace of the previous three months.

Bloomberg