The Bank of England's interest-rate-setters voted 8-1 in favour of leaving the cost of borrowing unchanged at 5.5 per cent this month because of fears over British inflation, it emerged yesterday.

The minutes from the Bank of England (BoE) Monetary Policy Committee meeting at the beginning of January show that its members judged that although the downside risks to the economy had grown, short-term price pressures had also gone up.

Only David Blanchflower, the committee's most doveish member, voted for a second consecutive quarter-point cut after the reduction in December from 5.75 per cent to 5.5 per cent.

The minutes stated: “Reductions in the Bank Rate in two successive months might, given the current conjuncture, encourage obervers to think that the Committee was focused more on stabilising demand than meeting the inflation target.”

The hawkish tone of the minutes reflected comments from Mervyn King, the Bank of England Governor, who said in a speech on Tuesday that although the British economy faced its toughest period in more than a decade, the central bank's ability to cut interest rates aggressively was limited by inflationary pressures.

However, the minutes did little to alter market expectations that interest rates would fall next month, probably by 25 basis points.

Karen Ward, UK economist at HSBC, said: “Overall, the details of the minutes just reiterate the signal sent in the recent speeches from the Governor and [his deputy] Sir John Gieve.

“The downside risks to growth are increasing, but so are the upside risks to inflation. This won't prevent them cutting rates altogether, it will just add some caution to their behaviour. The Governor's speech [on Tuesday] highlighted that rates were probably unnecessarily above neutral, so could be lowered.”

Matthew Cairns, senior European economist at Moody's Economy.com, said: “The BoE is less concerned about the decline in equity markets. It blames a period of excessive borrowing and risk-taking by financial institutions and thinks that the decline in equity markets is a correction of previously high expectations”.

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