LONDON (MarketWatch) -- Fears of a potentially sharp "monetary contraction" led the Bank of England's rate-setting Monetary Policy Committee to put aside worries about inflation pressures to unanimously back a coordinated set of rate cuts earlier this month by the world's top central banks.
The MPC voted 9-0 to cut the bank rate by 50 basis points, or half a percentage point, to 4.5% on Oct. 8, minutes from the special meeting revealed Wednesday. The BOE joined the U.S. Federal Reserve, the European Central Bank, the Swiss National Bank and others in simultaneous rate cuts aimed at jumpstarting frozen credit markets. See archived story.
The unanimous vote wasn't a surprise.
Details of the meeting come a day after Bank of England Gov. Mervyn King warned in a speech that the British economy had entered a recession and signaled that further, aggressive rate cuts were on the way.
"The minutes of the October extraordinary meeting were on the same wavelength as yesterday's speech from Gov. King," said Chiara Corsa, economist at UniCredit MIB in Milan, in a research note.
The growth and inflation outlook outlined by King and the BOE minutes "warrant a decisive monetary-policy easing ... we have very little doubt that the easing cycle will be front-loaded and the repo rate will likely be cut to 3%" by the end of the first quarter of 2009. Corsa expects a half-point cut in the key rate to 4% at the MPC's November meeting.
The Bank of England strives to meet an annual inflation target of 2%. The central bank had lowered its key interest rate from 5.75% to 5% between December 2007 and April, but then paused as energy- and food-related price rises pushed headline inflation well above the target rate.
"Over the month, the risk of a sharper monetary contraction had risen, and hence of a more pronounced slowing in activity and employment than was needed to keep inflation at target in the medium term," the minutes said.
In the October meeting, however, the committee "judged that, during the past month, the balance of risks to inflation in the medium term had shifted decisively to the downside."
The debate over the inflation outlook had previously divided the rate-setting MPC. The panel's regular September meeting had produced an 8-1 vote in favor of leaving rates unchanged. Economist David Blanchflower maintained a string of dissents at that gathering, urging an immediate half-point cut in the bank rate.
In August, the panel had split three ways, with Blanchflower urging a cut and MPC member Tim Besley urging a quarter-point rate hike.
In the special October meeting, Bank of England Gov. Mervyn King briefed MPC members on the proposal to cut the bank rate to 4.5% as part of a coordinated set of rate cuts.
The minutes recounted sharp rises in interbank lending rates, rising credit spreads and other signs of distress in credit markets, as well as a fall in commodity prices, including oil, amid expectations for weaker world growth.
Meanwhile, the outlook for the economy in the second half of 2008 had "weakened markedly," the minutes said, noting falls in industrial production and sharp declines in closely-watched confidence surveys for the manufacturing and services sectors.
And although inflation had continued to rise, with annual consumer inflation edging above 5% in September, surveys showed the public's inflation expectations were unchanged, the minutes noted.
The British pound plunged in the wake of King's remarks Tuesday and extended losses Wednesday, hitting a five-year low against the U.S. dollar. Read Currencies.
"The governor is being more candid, refusing to indulge in semantics or word-games about technical definitions: recession is here," wrote Michael Saunders, head of European economics at Citigroup. "Implicitly, he is also saying that policy must shift to reflect that grim economic fact and deal with it, rather than seek to deny it."
