INTEREST rate setters at the Bank of England split three ways for the first time in eight years this month, with a vote for a rate cut balanced by the first vote for higher borrowing costs in a year, minutes of the Bank’s Monetary Policy Committee (MPC) revealed yesterday.

The pound rose sharply as the markets saw the highly unusual vote as the clearest signal yet from the Bank that the next move in rates will be upwards.

Professor Stephen Nickell was the member who voted for a cut in rates, the minutes of the MPC’s May meeting showed. But the meeting was his final one on the committee. His place will be taken next month by David Blanchflower, an American academic.

The unexpected vote by committee member David Walton for a rise in rates to 4.75 per cent could be more influential in the months ahead if he continues to make the case for higher borrowing costs.

While Professor Nickell has called for lower rates for the past six meetings, it was the first time that Mr Walton, who has a doveish voting record, has called for higher rates.

The minutes carried a hint that his fellow MPC members might share the view that rates should rise, but not so quickly.

The six members who voted for no change to rates, the minutes said, believed that “there was no need to stimulate demand [with lower rates] at this time”, but also that there was “no pressing need to tighten policy”.

Geoffrey Dicks, of RBS Financial Markets, emphasised the word “pressing”. He said: “That is an asymmetric assessment and suggests that most members, though currently in the ‘hold’ camp, have a bias to hike.”

The suggestion that rates would probably have to rise is in line with the Bank’s Inflation Report, published last week, which forecast that inflation would hit its 2 per cent target in two years’ time only if, as the market expects, interest rates rise at least once over that period.

May’s meeting was the first time since August 1998 that the MPC has split three ways, and only the third time it has done so since it was set up in 1997.

Mr Walton argued that output growth appeared to be above its trend level and that spare capacity in the economy was therefore small. He pointed to a higher risk of inflation from stronger energy and commodity prices, which he said could encourage expectations of inflation to rise if the Bank did not act.

Some of the members who voted for no change to rates, however, argued that the Bank could not fine-tune inflation expectations with rate changes and said that uncertainty over the extent of spare capacity in the economy meant that it was sensible to wait for clearer statistical evidence on inflationary pressures before moving. Philip Shaw, chief economist at Investec, said: “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.”

Only eight members attended May’s meeting because Richard Lambert left the MPC in March and the Treasury has yet to announce his successor.

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