The Bank of England's monetary policy committee voted seven-two in favour of keeping interest rates on hold at 4 per cent in November, compounding expectations that rates will not move lower next month.
Strong consumer demand and fears of further stoking the over-fuelled housing market persuaded the majority to keep rates steady, but Christopher Allsopp and Stephen Nickell voted for a quarter-point cut, according to the minutes of the MPC's November 7 meeting, published on Wednesday.
The MPC was split six-three at its October meeting, when Kate Barker also voted for a reduction, but expectations that the committee was leaning towards cutting rates receded when the Bank's latest inflation report highlighted the risk of higher inflation from public sector pay and the rise in National Insurance contributions.
Mervyn King, the Bank's deputy governor for monetary policy, on Tuesday night dealt another blow to hopes for an imminent cut, warning that the economy was vulnerable to a sharp fall in demand because of mounting imbalances prompted by the house price boom.
By leaving the benchmark rate at 4 per cent for the 12th successive month, the MPC ushered in the longest period of stable interest rates since July 1966, when they had been held at 6 per cent for a year.
Lower rates risks stimulating house prices
Although weak world demand and the prospect that consumption growth might slow sooner than forecast made a case for lowering rates, the minutes noted that household borrowing and demand for loans remained strong and there were few signs that lenders were tightening credit conditions.
"A reduction in interest rates now risked stimulating house prices and household borrowing even further, increasing the risk of a sharper fall in consumption at some point in the future," the minutes said.
Inflation projections suggested that keeping rates at 4 per cent would be consistent with hitting the inflation target both over the next two years and at the end of the forecast horizon.
John Butler of HSBC said the committee was moving away from cutting rates, and although a cut was more likely in the next months than a hike, this would be in reaction to bad news rather than pre-empting it bad news.
"Quite simply, there appears to be a growing feeling amongst some on the MPC that they may have over-stimulated the housing market and that now there is little the Committee can do but wait-and-see."
Investec's Philip Shaw said the monetary policy debate had shifted away from the 'to the letter' adherence of hitting the 2.5 per cent inflation target towards attempting to ensure that the housing boom was not followed by consumer bust, dragging the economy and inflation down alongside.
With the MPC watching to see if downside risks materialised, he saw the chances of a final quarter-point cut early next year as greater than even.
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