The Bank of England's rate setting body voted by an 8-to-1 margin to keep the benchmark repo rate unchanged at 4.50 pct earlier this month, the minutes of the meeting on Jan 11 and 12 revealed today. In a repeat of the voting pattern in December, the dissenting vote came from Stephen Nickell who again opted for a quarter point reduction to 4.25 pct.
For him there was a case for "immediate" action to lower the cost of borrowing, with GDP growth below trend for some time alongside the emergence of spare capacity in the economy.
Additionally, he felt that growth in government spending was likely to slow from 2007, making it unlikely that the gap between actual and potential output would diminish as much as envisaged by the BoE's last round of forecasts in November.
While Nickell conceded that the outlook for consumption had improved he also felt that the central bank's own projections for investment and trade were still "too optimistic."
He said that the modest price pressures in the pipeline suggested that inflation will fall below the 2.0 pct target once the effects of higher energy costs fall out of the equation.
The majority however, believed that interest rate should stay unchanged for yet another month. The nine-strong panel last cut the benchmark rate in August, to 4.50 pct from 4.75 pct.
They said that demand in the euro-zone had picked up beyond expectations and that UK economic expansion was in line with the BoE's forecasts, although the mix of growth was slightly different than previously thought.
They said UK growth will likely be broadly in line with its historic average over the new few quarters, citing stronger-than-expected indicators in the service sector, housing market and on consumption growth. Furthermore, movements on financial markets should also encourage demand, they said. However, they did note that business investment and exports had been weaker than expected and continued to pose downside risks to the overall growth outlook.
On inflation, they were encouraged by the retreat in the annual CPI rate and felt that inflation expectations were well anchored. At the same time, there was little sign that higher oil prices were stoking inflation in the wider economy.
They also felt that there was "probably some spare capacity" in the economy but believed that this will help lower inflation over the coming months. But for them the extent of the gap between actual and potential growth was "uncertain." Over the short term they identified some risks which may push up inflation, among them higher oil and gas prices, the movement in import prices and the exchange rate.