Bank hints UK's dose will be just a small one

Just one member of the Bank's powerful monetary policy committee voted for a reduction in rates earlier this month, when the Bank left rates on hold at 5.5%, today's publication of the minutes of the 10 January meeting reveal.

City economists had thought the vote had been much closer, with most predicting that there had been a six-three split. But the minutes showthe vast majority of the committee agreed the short-term inflation outlook had "worsened markedly" following rises in fuel bills and food prices.

Only the ever-doveish David "Danny" Blanchflower, who flies in from his professor's chair in the US for the monthly meetings, felt the threat to growth outweighed the pressure on prices. He voted for an immediate quarter-point cut to follow the one in December.

He said demand for UK goods and services, particularly from the US, had materially worsened and that meant the risk of a sharp and persistent slowdown in activity had increased.

But for the other eight members of the committee, inflation remained the greatest risk. The minutes said theywere still worried by falling house prices and tightening credit conditions, and their knockon effects on consumer demand.

But the recently announced price increases by energy suppliers nPower and EDF, on top of rising petrol and food prices, "could put substantial upward pressure" on inflation in the short run.

The MPC said it feared rate cuts in two successive months might suggest the Bank was "focused more on stabilising demand than meeting the inflation target".

Details of the January rates vote come after Bank Governor Mervyn King warned last night that the UK economy faced its toughest challenge since 1997. He also ruled out any dramatic interventions, saying that the financial system couldn't be salvaged merely by cutting borrowing costs. Some saw this as a clear rebuff to the Fed.

But King did indicate that UK rates are likely to come down, saying: "We start the year from a position in which the Bank Rate, at

5.5%, is probably bearing down on demand."

By the time of next month's meeting, the MPCwill be armed with the Bank's quarterly inflation report, which should provide enough fuel to justify another rate cut.

A further nudge in that direction came with today's data showing economic growth slowed from 0.7% in the third quarter of 2007 to 0.6% in the fourth.

James Knightley, an economist at ING, said: "Today's UK macro newsflow seems supportive of the idea of gradual policy-easing from the Bank rather than an aggressive series of rate cuts that the Fed is implementing."