Split on MPC raises expectation of interest rate increase this spring

The odds of an imminent rise in interest rates shortened dramatically yesterday after it emerged one of the nine members of the Bank of England's Monetary Policy Committee voted for an increase.

The odds of an imminent rise in interest rates shortened dramatically yesterday after it emerged one of the nine members of the Bank of England's Monetary Policy Committee voted for an increase.

Paul Tucker, an executive director at the Bank, called for a quarter-point increase this month, while other members hinted they might support one if the economy continued to expand. It was the first split for 10 months and several analysts said it settled the debate over whether the next move would be up or down.

Michael Saunders, at Citigroup, said: "We continue to expect that the MPC will raise rates by a quarter-point in May or June but an April rise cannot be ruled out."

The pound rose against the euro, while yields on two-year gilts rose to five-month highs as traders bet on a rise in rates.

The minutes showed most members thought the balance of risks to the outlook was "sufficiently to the downside" to justify keeping rates on hold at 4.75 per cent. They said the main risks were that consumer spending would weaken further and inflation would continue to stay below target.

But the minutes added: "Some members noted that an increase might be warranted in due course if the economy evolved in line with the central projection."

Mr Tucker told his colleagues he believed a rise was warranted now in the light of the rebound in GDP growth, shares, borrowing and the housing market. "Market participants might be surprised by such a move, but the committee would be able to offer a cogent explanation," he said.

The CBI, the largest employers' group, yesterday raised its forecasts for growth this year from 2.5 to 2.7 per cent and said mounting inflationary pressures would force the Bank to raise rates sometime towards the end of spring.

"We are of the view that the economy is running in line with potential and we are getting anecdotal signs that the labour market is essentially full," Ian McCafferty, its chief economist, said.Shortages were found in sectors such as retail and among low-skilled jobs paying £5 to £7 an hour, he said.