MPC vote points to interest rate rise by the Bank next month

Interest rates in the UK could rise above 5 per cent in the new year, analysts said yesterday, after it emerged that the two newest members of the Bank of England's key policy committee had voted for a rise this month.

The Monetary Policy Committee voted by seven to two to keep the base rate pegged at 4.75 per cent two weeks ago, a narrower margin than the City had expected.

Economists at the major investment banks said a quarter-point rise to 5.0 per cent next month was a done deal. "The focus has moved on to the possibility of another one in February," said Geoffrey Dicks, the chief UK economist at the Royal Bank of Scotland.

The minutes of the meeting of 4 and 5 October showed there was a three-way split on the committee. "For most members, the decision was finely balanced," they said.

Tim Besley and Andrew Sentance wanted to raise rates immediately, arguing that taking action now would reduce the need for harsher measures later. They said the growth in retail sales and housing prices pointed to "resilient" consumption, while healthy corporate profitability suggested a robust outlook for investment.

They also highlighted evidence from the Bank's own regional agents showing that manufacturers, retailers and business services were pushing through the sharpest price rises since modern records began.

Five other members said they placed "considerable weight" on the arguments for a rate rise, but said there was no "pressing need to raise rates this month".

The minutes said: "An immediate rise might encourage a further increase in market interest rate expectations and hence provide an additional degree of tightening that was not required at this juncture."

Some said they wanted to assess the impact of August's rate rise and called for analysis on the impact of the increase in labour force participation. One member - almost certainly David Blanchflower who voted against the August rate rise - placed a lot of weight on the possibility that the labour market would slacken.

"Consequently the degree of spare capacity in the economy was somewhat larger than thought at the time of the August inflation report," he said.

The pound rose against the dollar and the euro as traders absorbed the implications of the unexpected votes by the two newcomers.