MPC voted 8-1 for 0.5% Feb cut

Wednesday 18th February 2009

The Bank of England monetary policy committee voted eight members to one for the February 0.5 per cent base rate cut – as low rates were found to threaten banks' profits.

The majority of the MPC voted that a 0.50 per cent cut was appropriate – as there was "a great deal of uncertainty about what would happen to banks’ and building societies’ ability and willingness to lend at low levels of interest rates".

It also warned a bigger cut could have "significant" negative impact on lenders' profitability.

The committee warned as saving rates and the Bank rate drop closer to zero per cent, the margins lenders have when providing loans would be squeezed.

"At very low rates of interest, the stimulus that a reduction in Bank rate could provide was likely to be much reduced," the MPC admitted – suggesting the next move for monetary policy will be to increase the money supply through quantitative easing and not cutting rates.

"Indeed, there might even be a point at which further cuts in Bank rate could have an adverse impact on the economy."

The minutes stated banks and building societies would increasingly not pass on full rate cuts – except where they were contractually obliged to do so.

"Where banks passed on cuts in Bank rate to their borrowers (because, for example, they were contractually obliged to do so), that would lead to a fall in banks' profits, which might cause them to restrict their lending further with potentially adverse consequences for the rest of the economy," he said.

David Blanchflower was again the lone voice of dissent – calling for a full one per cent cut.

The US-based economist has now called for interest rate cuts at every MPC meeting since October 2007.

Mr Blanchflower argued – the minutes of the meeting released today reveal – that "historically, policy errors had been made by cutting too late rather than too soon".

The MPC did predict recent interest rate and tax cuts along with the fall in sterling would start to boost the economy – but further cuts and quantitative easing could be necessary to meet inflation targets.

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