Falling pound leaves Bank split over the threat from inflation

Hopes of a cut in interest rates next month were dealt a blow yesterday after it emerged the Bank of England is concerned about the inflationary impact of the falling pound.

Economists said May's decision was now finely balanced as the minutes of the 10 April meeting showed the Bank was split over its decision to keep borrowing costs on hold earlier this month.

The Monetary Policy Committee (MPC) voted seven to two to keep rates unchanged at a 48-year low of 3.75 per cent, the minutes showed. The decision was not as close as some had expected and there were signs the majority were swayed by the strength of the rise on the stock markets and the inflationary threat from the fall in the pound.

However, they also said they wanted to wait for the quarterly growth and inflation forecasting round that takes place next month and which will be key for the next decision on 8 May.

"There were a number of issues that would benefit from further analysis in the context of the forecast round leading up to the May Inflation Report," the minutes said.

"It was not clear at this stage what the committee would conclude about these issues and hence what the consequences would be for the inflation projection." These included the 5 per cent fall in the pound's exchange rate since the February forecast and the impact of the Budget

"A purely mechanical simulation with the Bank's medium-term macroeconomic model suggested that it could add somewhere between 0.5 and 1 percentage point to inflation during 2004," it said.

The pound rose after the publication of the minutes as some analysts said May's decision would now be a tight call.

Simon Rubinsohn, chief economist at City stockbroker Gerrard, said: "The outcome will be a closer call than seemed likely not so long ago. On balance the MPC may just feel that it wants to keep its powder dry at this stage."

The minutes contained ammunition for both sides of the debate. The MPC did not debate a rate hike as it did in May and struck a gloomy tone on the strength of the recovery. Consumer spending was slowing and surveys of business and consumer confidence had deteriorated, it said.

The dissenters – Christopher Allsopp and Marian Bell – said factors, together with falling house and oil prices and weaker pay settlements justified an immediate cut. The majority said recent news was "ambiguous".