The Bank of England moved closer this month to raising interest rates, after a third policymaker voted for a rise and others said they might tighten policy if the economy rebounds from a slump at the end of last year.
Minutes to the BoE's February 9-10th meeting showed chief economist Spencer Dale joined Andrew Sentance and Martin Weale in voting for higher rates, tilting the nine-member Monetary Policy Committee towards a May rate rise to tackle rising inflation.
Economists had expected a repeat of last month's 7-2 vote to keep policy unchanged, though they did not fully exclude the chance that another MPC member would join the BoE's hawkish camp after Governor Mervyn King said last week that the MPC was unusually divided.
"Given the strength of inflation, firm activity data seem likely to propel the MPC into a rate hike sooner rather than later," said Simon Hayes, economist at Barclays Capital.
Inflation is running at double the BoE's 2 per cent target and is set to rise further, putting the Bank under pressure to take action. However, many policymakers believe price rises are being driven by one-off factors like last month's rise in VAT and the spike in oil prices.
Nonetheless, strong purchasing managers' surveys this year suggest Britain's economy is back on track for recovery after a snow-related blip at the end of last year. This could allow firms to pass on rising input costs and drive up inflation.
"Of those members not favouring a rise in Bank Rate, some thought that the case for an increase had nevertheless grown in strength," the minutes said.
New details of the BoE's inflation forecasts published today showed the central bank expects inflation to remain above target until the end of 2012 and to fall below 2 per cent thereafter if interest rates rise as markets expect.
Money markets are pricing in a quarter-point increase in borrowing costs from their record low 0.5 per cent by May, with rates seen rising to 1.25 per cent by the end of this year.
"I think it is pretty likely that within the next three to four months we will see 25 basis points on UK rates," said Peter Dixon, an economist at Commerzbank.
The BoE faces the dilemma of how to defend its inflation-fighting credibility without derailing a fragile economic recovery, as the 0.5 per cent drop in economic output at the end of 2010 was only partly due to the cold weather.
But divisions on the committee are becoming more apparent, with Mr Dale the first BoE insider on the MPC to side with the external members in taking a dissenting view.
Mr Dale and Mr Weale both called for a 25 basis point increase in the interest rate, while Mr Sentance upped his call to a 50 basis point increase due to concerns that firms were passing on higher costs.
Analysts reckon deputy governors Charles Bean and Paul Tucker may be the next to join Mr Dale in his call, increasing the isolation of Governor King, who has already come under pressure for not doing enough to curb inflation.
The minutes showed that the MPC saw upward risks to inflation from commodity prices, loose monetary policy in emerging markets and inflation expectations - though there was little evidence that the last of these had increased materially.
Reuters