Bank split on rates but cut seen on horizon

By Matt Falloon

LONDON (Reuters) - The Bank of England mulled the case for both a cut and hike in interest rates this month before a majority of policymakers held rates at 5 percent, but bleak economic signals continue to swing the balance towards a cut.

Minutes from the Bank's August meeting published on Wednesday said the upside risks to inflation had eased, helped by falling oil prices, but also noted an immediate quarter-point cut in rates may raise questions about where policymakers' focus lay.

The Bank is keen to keep inflation expectations anchored, with inflation running at more than twice the 2 percent target and set to spike even higher, but there was more evidence on Wednesday of a worsening economic outlook.

Surveys showed manufacturers expect to cut back production at the sharpest pace in nearly seven years as orders fell for a second straight month in August while mortgage lending also slumped on a year ago in July.

"The fact that the (Monetary Policy) Committee even discussed the arguments in favour of a rate cut suggests that it is gradually edging towards a loosening bias," said Jonathan Loynes, chief European economist at Capital Economics.

"With inflation set to peak within the next few months and the economy heading rapidly towards recession, we still think that interest rates will be falling by the end of this year."

THREE WAY SPLIT

The minutes showed Timothy Besley sustained his vote for higher rates, David Blanchflower repeated his call for a cut but the other seven policymakers felt the best course for now was to wait and see if slowing demand will be enough to tame inflation.