The Bank of England yesterday left the door open for another rise in interest rates as an unexpected vote by two members of its Monetary Policy Committee for no change this month was offset by a direct warning over a surge in pay deals.
The MPC split 7-2 in favour of the quarter-point rise in the base rate on 9 November. Rachel Lomax, a deputy Bank governor, joined the arch-dove David Blanchflower in calling for rates to stay on hold.
The City had expected an 8-1 vote and the pound initially fell on hopes that it reduced the chances of another rate rise in the new year.
But analysts said the minutes of the meeting sent a clear signal that the committee was concerned about the risk of a surge in pay deals in the new year as workers sought to claw back the impact of rising inflation.
They said: "There was a risk that employees would seek to negotiate higher wages in order to resist the erosion of their purchasing power. If they succeeded, the downward adjustment of real take-home pay might be somewhat slower and the upside risks to inflation higher."
They also said economic growth is likely to stay "strong" while the "monetary stance might be accommodative" - code for rates being at a level that stimulated growth further.
They highlighted the risk of further rises in the price of assets such as houses and shares. "All these factors posed further risks to inflation," they said. "There was also a risk that, if inflation continued above target for much longer, that might come to be reflected in inflation expectations."
But for one of the dissenters, "the need for a rise was less pressing". That person thought there was probably room for the economy to grow more quickly and take up the extra slack in the labour market.
"The current spike in inflation was mainly related to large gas and electricity price increases which were still more than offsetting the recent fall back in petrol prices," the minutes said.
The other member who voted against the decision placed more weight on downside risks to demand and inflation.
Nick Stamenkovic, senior economist at RIA Capital Markets, said Ms Lomax's dissent had been a surprise, but the tone of the minutes was "quite hawkish".
"The majority is very much more concerned about the inflation picture than growth so another rate hike in early 2007 is a distinct possibility," he said.
"The wage round is absolutely crucial and they are determined to keep inflation expectations subdued, and if there is any pick-up they won't hesitate to react."Reuse content