Dove's change of stripe stirs fears of base rate increase

Speculation that the Bank of England could raise interest rates this year grew yesterday after minutes of the latest meeting of the Bank's monetary policy committee showed that one member voted to raise interest rates, the first time in a year that anyone has done so.

The minutes of the meeting this month showed that the committee was split three ways for the first time since 1998. Steve Nickell again voted to cut interest rates, the former Goldman Sachs economist David Walton supported a rise, while the remaining six members preferred to leave the base rate at 4.5%, the level it has been at since last August.

Mr Walton surprised financial markets by voting to tighten monetary policy because he had been seen as one of the more dovish members of the MPC. "Our impression is that the MPC is planning to raise rates in August and that it will take a run of soft data to dissuade the committee from pulling the trigger," said Philip Shaw, chief economist at Investec bank. "It is plain that a group of members, probably led by [governor] Mervyn King, continues to believe that the economy is gathering momentum and that a tightening is required to snuff out potential inflation pressures further ahead."

Not all economists agreed. "While Walton's vote boosts the chances that rates will rise in 2006, our best guess is still that they stay on hold for the rest of the year," said Jonathan Loynes, chief UK economist at Capital Economics.

Financial markets had expected Mr Nickell, attending his last MPC meeting, to repeat his vote for a cut but few had expected anyone to vote for a rate rise, especially not Mr Walton. Mr Nickell will be replaced by US academic David Blanchflower and further votes to cut the rate are seen as unlikely.

The minutes showed there was considerable discussion of the case for higher interest rates including the fact that business surveys pointed to a brighter future for economic growth, business investment and exports, all of which could push growth above its long-term trend and push inflation up from 2%. Some members felt that rapid growth in the prices of assets such as stocks and property implied that interest rates were quite low.

The committee also discussed the arguments for lower interest rates because consumption was weak and once oil and commodity prices stabilised inflation could fall back below target. But the minutes concluded that "on balance, most members felt there was no need to stimulate demand at this time given the signs of a pickup in growth and the near-term risks to inflation from higher energy prices. Equally, there appeared to be no pressing need to tighten policy given the continued weakness of domestically generated inflation."

Geoffrey Dicks of RBS financial markets said: "One hawk does not make a rate rise any more certain, but the switch of an erstwhile dove does raise the risk that the committee gels behind a hike later in the year."