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

By Svenja O'Donnell

Aug. 20 (Bloomberg) -- Bank of England policy makers split three ways in August in the decision to keep their benchmark interest rate unchanged as they balanced faster inflation against the risk of a recession.

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

Bank of England officials are struggling to agree on the best remedy for an economy facing what King calls a ``difficult and painful adjustment.'' 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.

``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.''

The Bank of England said there are ``significant risks to the inflation outlook.'' At the same time, policy makers noted that ``some measures of inflation expectations had fallen back in July'' and short-term price pressures probably ``eased a little.''

Rate Cut

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 below the central bank's 2 percent target in two years if the benchmark rate stays unchanged. Consumer prices rose 4.4 percent in July from a year earlier.

The Bank of England considered raising and cutting rates in addition to keeping them unchanged 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 towards 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.