Interest rates look set to rise over the spring after the Bank of England issued a warning over the strength of consumer spending, unemployment fell to a fresh three-decade low and City banks handed out huge bonuses.
Nevertheless, the Bank's monetary policy committee voted unanimously to keep the base rate pegged at 4.0 per cent earlier this month, the minutes of the meeting showed yesterday.
The minutes revealed that the MPC debated "several" reasons to raise rates and said the decision to leave them unchanged had been "finely balanced".
The main reason was the continued strength of consumer spending in the face of the Bank's forecast in February's inflation report of a marked slowdown.
"Domestic demand and consumption [are] growing more strongly than previously thought and seemed likely to continue to do so at least in the near term," they said. "That would reinforce the expected gradual build-up in inflationary pressure."
The committee, which believes house price inflation will slow to zero within a year, said the latest increase in house prices was "less easy to explain". It suggested a shortage of supply, an increase in homes bought as an investment and faster income growth among home-seekers.
Some members said the pick-up in house price inflation and accumulation of debt showed a rate rise was needed to reduce the risks of a destabilising property crash.
It said one member - almost certainly the deputy governor Sir Andrew Large - said rates should rise now, warning a delay might "entail a larger increase at a later date".
However, they decided that although the risks to inflation were now to the upside, the latest news had not "materially" changed the February outlook.
"That implied that, in the absence of shocks, a gradual [rate] rise would be necessary over the forecast horizon to keep inflation on target," the minutes said.
"Against that background, to raise rates at this month's meeting would be a surprise, which [would] prompt an unwarranted re-evaluation on the MPC's strategy by market participants and might as a result generate further upward pressure on sterling."
Simon Rubinsohn, the chief economist at the stockbrokers Gerrard, said: "The minutes can leave few in any doubt that the authorities are very much minded to raise rates further."
Yesterday's figures showed labour market conditions had tightened in the new year. The number of people claiming benefit fell 6,600 to 885,200 last month, the lowest since 1975.
The more respected Labour Force Survey measure tumbled by 33,000 in the three months to January to 1.436 million, just shy of a record low set in March to May 2001. The number in work rose 121,000 in the quarter to a record high of 28.27 million.
Average earnings growth unexpectedly surged to 4.4 per cent from 3.5 per cent in the three months to December. That was the highest since September 2001.
The ONS said the jump was driven by the financial services sector, where a 1.2 per cent jump in bonuses propelled the overall growth rate to 4.8 per cent.
John Butler, UK economist at HSBC, said this was the first sign of an increase in domestically generated inflation. "If that continues, it will only fuel the MPC's inflation concern," he said.
"The change on tone of the MPC from one meeting to the next simply illustrates the policy dilemma they face."Reuse content