New evaluation of interest rates as jobless falls

Financial markets revised their predictions of another cut in UK interest rates this year after news of falling unemployment and splits in the Bank of England's rate-setting monetary policy committee.

The minutes of the central bank's meeting two weeks ago, which cut interest rates by a quarter-point, showed that three of the nine-member monetary policy committee opposed the move.

Many independent economists had expected the vote to be unanimous. The three dissenters from the quarter-point cut were the bank's two deputy governors, Mr Mervyn King and Mr David Clementi, and the markets director Mr Ian Plenderleith argued that a cut in rates would risk worsening the imbalances in the economy.

They also argued that a surprise cut in interest rates could cause an overreaction in financial markets, with expected interest rates falling too far.

The prospects for interest rate cuts also diminished after official data released yesterday showed UK unemployment falling faster than expected.

The number of jobless claiming benefits fell 12,800 in July, against expectations from analysts of a fall of just 5,000.Expectations of interest rates in the financial markets shot higher, rising by up to a fifth of a percentage point after the figures and the minutes were published. Long-term interest rates also rose sharply.

Sterling, which has fallen against the euro in recent weeks, was little changed against the European currency after the news.

The interest rate futures market is now barely pricing in any cut in rates by the end of the year.

Last week, futures contracts were predicting a quarter-point cut by December.

Mr Peter Osler, head of research at GNI, a broker, said: "The market has now got the impression that the cut in interest rates was more of an insurance move than a determined move into easing mode."

He said there had been heavy interest in the futures market from hedge funds and other speculative traders. "When uncertainty is high and we may be at a turning point in interest rates, there is likely to be volatility."