Bank of England policymaker Andrew Sentance repeated his lone call for an interest rate hike in September but some of his colleagues thought the probability that more monetary easing would be needed had increased.
Minutes of the Monetary Policy Committee's last meeting showed an 8-1 vote for leaving interest rates on hold at a record low of 0.5 percent, as expected, with Sentance voting for a 25 basis point hike for the fourth month running.
Most MPC members thought there were substantial risks to the outlook on both sides and stood ready to respond in either direction but some of them argued that the chances were that more easing would be needed to bolster the economy had gone up.
Sterling fell nearly a third of a cent against the dollar and gilt futures rallied as traders bet the bank could yet expand its £200BN asset-buying programme – or quantitative easing as it is known – especially after the U.S. Federal Reserve signalled on Tuesday it too stood ready to inject further stimulus.
"The arguments proposed by the doves on the committee are gaining greater currency with the other members," said Samuel Tombs at Capital Economics.
Most analysts expect the Bank to hold policy steady well into next year as the economy is only just recovering from the worst recession since World War 2 and sharp government spending cuts are likely to dampen growth next year.
The MPC noted that there was a key risk that persistently high inflation outturns – the latest number was 3.1 per cent, more than a percentage point above target – would become embedded in consumer psychology.
It said in the minutes that so far there was little sign of this happening. But the bank's own survey published last week after the September meeting showed inflation expectations creeping up to hit a two-year high.
Against the risk of higher inflation expectations, MPC members were also worried that growth could slow sharply and push inflation well below the two per cent target in the medium-term.
To this end, they noted that activity indicators pointed to a slowdown in the second half of the year after the unexpectedly strong growth in th second quarter.
One MPC member thought this had raised the risk of the supply capacity of the economy taking a hit if the H2 slowdown prompted firms who had been expecting a pick-up to start laying off workers and scrapping investment plans.
City A.M. Reporter