Minutes of the meeting between Eddie George, Governor of the Bank of England, and Kenneth Clarke, Chancellor of the Exchequer, published yesterday, show the Governor was worried about how the markets would interpret a failure to increase rates. He said an immediate move would improve perceptions of future inflation.
According to the minutes, Mr George said that to delay and then have to move under market pressure would be very damaging to the whole approach to monetary management that was being pursued. The economy was still growing at a pace faster than could be sustained, and higher inflation was moving down the production and distribution chain.
Even though there were signs that the pace of growth was beginning to slow, Mr George concluded that there were "clear danger signals". He advised an immediate half-percentage point rise in base rates.
The minutes suggest that Mr Clarke was less alarmed about inflation dangers. He said the outlook for the economy was attractive, with signs that growth was beginning to slow to a more sustainable rate. There were more tax rises to come, and he argued that the two previous base rate rises had not yet had their full effect.
Even so, Mr Clarke accepted they would have to increase rates again at some point, and he accepted the Governor's argument about market tactics.
Their conclusion was that raising interest rates in good time boosted the chance that the inflation target could be met with a lower level of rates than otherwise - and events have borne this out.
The short sterling market, used to bet on interest rate changes, is now expecting base rates at 7.5 per cent in June, compared with 8 per cent before 2 February.
Ian Shepherdson, UK economist at HSBC Markets, said: "These minutes make much more of market considerations than previous ones. That introduces a bit of grey into what they used to portray as black and white decisions."
Paul Mortimer-Lee, chief economist at Paribas, said it was sensible to pay attention to market conditions. "You want to get the biggest impact you can from raising rates, without scaring the horses," he said.
The Chancellor and Governor next meet on 5 April, but the market consensus is that another increase in base rates will wait until May or later.