Surge in retail sales fuels predictions of an early rise in interest rates

Growing signs of a split among the Bank of England's interest rate setters, and the biggest retail sales surge since 2004, yesterday fuelled fears of an early move from Threadneedle Street to keep the recovery under control.

The Bank has said that rises in interest rates – currently priced in for February – will be "gradual and limited". But minutes of its May meeting dropped a heavy hint over an earlier potential move to lift borrowing costs from their record low of 0.5 per cent, where they have sat since March 2009.

The record of the Monetary Policy Committee meeting said: "It could be argued that the more gradual the intended rise in Bank rate, the earlier it might be necessary to start tightening policy." Although the vote to hold rates was unanimous, faultlines are emerging on the nine-strong committee as "some members" – likely to include the hawkish Martin Weale and Ian McCafferty – thought the decision was "becoming more balanced". Ross Walker, UK economist at the Royal Bank of Scotland, said: "We had expected some erosion of the consensus but not to this extent."

The minutes emerged as retail sales figures showed sales volumes jumping 1.3 per cent in April to stand 6.9 per cent higher than a year ago, the fastest annual pace since May 2004. Although boosted by a later Easter, the sales were far higher than expected by the City, prompting dealers to raise their bets on a early rate rise.

Food sales jumped 3.6 per cent on the month as major grocers clash in a price-cutting war and, against a backdrop of an economy growing at more than 3 per cent annually, sterling jumped almost a cent against the dollar, reaching as high as $1.6921 and also hit a 16-month peak against the euro.

Following the lapse of the first incarnation of the Bank's forward guidance as unemployment dropped rapidly to 6.9 per cent, the eventual timing of an interest rate rise will be ultimately governed by the MPC's view of the amount of slack left in the economy.

But the hawkish tone of the minutes took markets off-guard following an ultra-dovish performance from the Bank's Governor, Mark Carney, in last week's Inflation Report.

"The pound's spike suggests investors are finding a very different policy outlook based on today's meeting minutes," Nawaz Ali, at Western Union, said. The housing market also remains a concern for the MPC, although actions to cool it are likely to be left to the sister Financial Policy Committee.

David Tinsley, an economist at BNP Paribas, said: "Over the next few meetings we do expect these discussions to evolve further, especially if UK data continues to show the sort of strength seen in today's retail sales report. By the summer, one or more MPC members could be voting for a hike."

The retail figures showed food stores enjoying the fastest year-on-year rise in sales since January 2002 as customers capitalised on the supermarket price war, driving average weekly sales to £3bn, the Office for National Statistics said. Annual price inflation at grocers halved to 0.9 per cent last month from 1.8 per cent in March.