Expectations of a Bank of England interest rate cut shot up on Wednesday after news that, for the first time in two years, two policymakers had called for lower borrowing costs. Short sterling interest futures recorded their biggest jump since February 2003, the FTSE-100 index of leading shares rose and the pound fell heavily after minutes of the Monetary Policy Committee's June 8 and 9 meeting were published.
The minutes showed Charles Bean, the chief economist, and Marian Bell, the MPC's leading dove who ends her term this month, both voted for a quarter-point rate cut, saying it was needed to ensure a consumer slowdown did not turn into a rout.
But the other seven felt the competing risks of slowing household spending and rising inflationary pressures had not been resolved and opted to leave interest rates at 4.75 percent for the 10th month running.
"There was time to gather further evidence on the depth and extent of the slowdown in consumption to see if lower interest rates were warranted," the majority argued, according to the minutes. The discussion of lower interest rates marked quite a turnaround. BoE deputy governor Andrew Large was calling for a hike only a month ago.
"In what by one measure is the fastest U-turn at the BoE since independence in 1997 the MPC started to discuss a rate cut in June, just one month after still contemplating a hike in May," said Holger Schmieding, economist at Bank of America.
"The chance that the BoE will ease in August has risen sharply."
Besides the consumer, the MPC was worried by the global outlook, particularly as prospects for the European economy have worsened in recent weeks, highlighted by Sweden's surprise half-point rate cut on Tuesday.
But economists cautioned that a UK rate cut could still take some time. Certainly, the minutes showed the BoE was surprised at the extent to which British market interest rates were pricing in a reduction given the mixed data.
BoE Governor Mervyn King told markets last week the MPC had to balance upside inflation risks from faster broad money growth, labour costs and import costs against the downside threat from slowing consumer spending.
Separately on Wednesday, the BoE's regional agents said in a report that pay pressures continued to edge up but gradually increasing cost pressures were having little impact on headline inflation.