Bank of England policymaker Martin Weale unexpectedly joined Andrew Sentance in voting for a quarter-point rate rise this month, and the Monetary Policy Committee as a whole considered the case for tighter policy. Minutes to the BoE's January 12-13 MPC meeting published on Wednesday showed that the decision to leave rates unchanged was "finely balanced" for some members and that February's inflation report would help them assess the outlook for prices.
Sterling rose on the prospect of an earlier BoE rate rise - although the policy deliberations took place before it was known that Britain's economy unexpectedly shrank 0.5 percent in the last three months of 2010. "The cracks are starting to appear in the MPC consensus," said Brian Hilliard, economist at Societe Generale. "Not only did Weale vote for a rate increase, there's a hint that other members were teetering on the brink of doing that as well."
Inflation hit an eight-month high of 3.7 percent in December and was at least a percentage point above its 2 percent target throughout 2010, causing some economists to question the central bank's inflation-fighting zeal. The minutes said inflation was likely to be "materially higher" in the short term than the MPC had thought in November, and late on Tuesday BoE Governor Mervyn King said in a speech that it could rise toward 5 percent in the coming months. Policymakers saw longer-term challenges as well from rising commodity prices and import costs. "For most members, recent developments implied that the risks to inflation in the medium term had probably shifted upwards," the minutes said.
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