The Bank of England discussed ordering an unprecedented half-point interest rate rise two weeks ago to "surprise" consumers and homebuyers, it emerged yesterday.
The hawkish tone of the minutes of the meeting put the markets on notice that the next increase could come as soon as next month.
The minutes of the Monetary Policy Committee meeting on 6 May showed there was unanimous support for the quarter-point increase and a lengthy debate over the need for a half-point rise - something the MPC has not done to date. They were published as Gordon Brown, the Chancellor, gave tacit support for further rate rises to curb inflationary pressure from rising wages and oil prices.
The pound surged almost a cent against the dollar on fears of the first back-to-back rate increase for four years while the financial markets priced in interest rates of 5.5 per cent by the end of next year. Phil Shaw, the chief economist at Investec, said: "The MPC has finally lost patience with the resilience of consumer activity and house price inflation. It is clear the Bank is insisting that there will be no more 'Mr Nice Guy' and is about to play the role of 'bad cop'."
Analysts said the Bank crucially did not refer to its policy of "gradual" rises in interest rates - which has been seen as a signal it was happy to raise rates every three months to coincide with its latest inflation forecasts.
Paul Dales, the UK economist at Capital Economics, said: "Overall the MPC is clearly thinking of picking up the pace of monetary tightening in the coming months. The chances of a rate increase in June have increased."
The minutes showed that at least one of the nine economists on the MPC put forward a case for a half-point rise to 4.5 per cent - although none voted for it.
They said the Bank's own forecasts showed inflation overshooting the 2 per cent target even if the Bank went ahead with the quarter-point rise to 4.25 per cent.
They warned consumer demand could grow more strongly than forecast and said small rate rises now raised the risk of a more rapid rise in borrowing costs further out.
"The surprise entailed by a 50 basis point increase might help to moderate the continuing rapid rate of increase in consumer indebtedness by affecting the behaviour of both borrowers and lenders."
In the end the MPC decided on a quarter-point rise, saying inflation was below target and likely to remain so for the next two years.
"Even if it proved necessary for rates to rise a little more rapidly at some point than the market currently expected there was time to assess and explain ... before implementing a further increase if needed in the light of subsequent news."
Meanwhile the Chancellor said the Bank should not tolerate threats to its inflation target. "We are and will continue to be in a low-inflation environment," he told the House of Lords committee.
"Whatever else happens in the economy, the Bank will insist on the inflation target being met. No wage bargainer will be rewarded for expecting that inflation will be higher."