King coming under pressure to raise interest rates

Martin Weale, who had been viewed as a moderate, unexpectedly joined long-standing hawk Andrew Sentance on the nine-member committee by calling for an immediate 0.25 percentage point rise in interest rates, minutes of the January 12-13 meeting revealed.

"The cracks are starting to appear in the MPC consensus," said Brian Hilliard, economist at Societe Generale. "Not only did Weale vote for a rate increase, there's a hint that other members were teetering on the brink of doing that as well."

The pound rose and short sterling interest rate futures tumbled on the news, which came a day after data showed Britain's economy contracted in the last three months of 2010.

Market expectations for future interest rates have swung wildly over the past two days. Investors now see a first rise in August as the most likely outcome; before Tuesday's gross domestic product data, the markets had generally expected an increase in May.

In a public speech on Tuesday, Mr King mounted a determined defence of the Bank's decision not to lift interest rates over the past year, arguing that inflation would fall back in 2012 as its recent surge was due to one-off pressures from import prices, oil and rises in indirect taxes.

He insisted that while the central bank would have to raise interest rates at some point, the move would not be based on headline inflation numbers; money supply and consumption would have to be growing too.

"A return to economic stability from our fragile condition will require careful and well-judged steps looking beyond the next few months," Mr King said.

But after inflation hit an eight-month high of 3.7 per cent in December, having stood at least a percentage point above the Bank's 2 per cent target throughout 2010, Tuesday's minutes showed increasing sympathy for the idea of early monetary tightening.

A small interest rate rise now might have little effect on economic growth but protect the Bank's inflation-fighting credibility, thereby averting a larger, more damaging rise in bond yields down the road.

The minutes said the MPC's 7-2 decision to leave rates unchanged at their record low of 0.5 per cent in January was "finely balanced" for some MPC members, and that the February Inflation Report would help them to assess the outlook for prices.