More MPC members want rate rise

The number of Bank of England policymakers backing an interest rate hike increased earlier this month as the threat of inflation heightened, minutes revealed today.

Spencer Dale, chief economist at the Bank, joined fellow monetary policy committee (MPC) members Andrew Sentance and Martin Weale in voting to lift rates from their historic low of 0.5%, despite a shock decline in the economy in the final three months of 2010.

Furthermore, the details of the meeting revealed some members who voted for no change in policy thought the case for a rate hike had "grown in strength".

However, the majority is prepared to wait for further insight into the strength of economic recovery in the first quarter of this year before tackling soaring inflation, which hit 4% in January and could reach close to 5% according to the Bank's forecast.

The increasing prospect of a rate hike meant the pound surged, hitting an annual high of 1.627 against the US dollar, according to analysts at currency exchange brokers Moneycorp.

Meanwhile, concerns mounted over the impact the unfolding political crisis in Libya would have on soaring oil prices and subsequently the overall rate of inflation.

The minutes of February's meeting showed that Mr Sentance, who has voted in favour of a hike since the summer, now wants to see rates at 1%, higher than his previous vote for an increase to 0.75%.

Mr Weale, who voted for a hike for the first time in January's meeting, and Mr Dale want rates to increase to 0.75%.

The minutes said the three hawks found the inflation threat, driven by rising global commodity prices, outweighed risks associated with the uncertainty surrounding the strength of the recovery.

However, the majority who passed the 'no change' outcome decided there was "merit" in waiting to see how well the economy performed at the start of the year, to help assess whether the 0.5% decline in GDP output in the fourth quarter was a one-off.

Expert reaction to the minutes was mixed, with some now expecting a rate hike in May and others playing down an imminent rise.

ING economist James Knightley said a rise in the near-term was less likely.

He said: "So far the data has bounced back from December's weather-related weakness, but with household spending constrained by negative real disposable incomes, falling house prices and constrained credit conditions, the prospect for growth remains poor."

But Shehan Mohamed, economist at Cebr, said the minutes provided evidence that interest rates could rise as early as next month and may reach 1% by the end of 2011.

But he warned: "A move towards a fast and pronounced tightening of monetary policy could damage the UK's overall capacity to grow."

Mr King, who played down the prospect of a rate-hike last week, has insisted temporary price shocks, including the price of oil, are pushing up inflation.

Oil price pressures look set to remain as turmoil in North Africa and the Middle East have pushed up the cost of Brent crude to more than 108 US dollars (£67.50) a barrel.

Chris Williamson, chief economist at Markit, said: "On one hand, rising oil prices threaten to drive inflation higher and will no doubt add to pressure on the Bank to hike rates in the short term, but on the other hand any sustained increased cost of energy will subdue economic growth and hit corporate profits in the longer term, suggesting that rates should be kept low for longer."