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Last Updated: Wednesday, 24 January 2007, 11:12 GMT
Bank voted 5-4 for rate increase
10 note
The rise took markets by surprise
The Bank of England's rate-setting body voted 5-4 to increase rates to 5.25% in January, minutes have shown.

Minutes of the Bank's Monetary Policy Committee showed they had voted by the narrowest possible margin for the increase, the third rise since August.

January's shock quarter of a point rate rise took the markets and public by surprise, but the Bank said it was a pre-emptive strike to curb inflation.

Analysts said the tight vote suggested a rate rise in February was unlikely.

However, GDP figures - which were also released on Wednesday - showed strong UK growth, making an interest rate rise a possibility later in the year.

"The odds now probably move away from a further rate hike in February as the MPC will want to wait and see how inflation spans out this month," said David Brown, chief European economist at Bear Stearns.

"There is still a tightening bias implied to policy and a move to 5.5% rates is probably in the frame by the end of the first quarter."

Economy 'robust'

Policymakers had been expected to wait at least until February before lifting the Bank's base rate to 5.25%.

But in its minutes the MPC stated: "For a majority of members there was already sufficient evidence to justify an increase in Bank Rate and no compelling reason to delay.

It really does question the committee as a whole's commitment to the need to take rates higher
David Page, Investec

"The world economy was robust, nominal domestic demand was growing strongly and real output growing at least at its potential rate."

In making its decision, the MPC knew that consumer price inflation (CPI) had risen from 2.7% to 3% in December, even though that figure had not been released.

In a speech given in Birmingham on Tuesday, Bank of England governor Mervyn King said the quarter point rise was needed to stop inflation straying further past the government's 2% limit.

He gave no hints on whether there would be further rate rises.

'Big surprise'

The MPC members who voted against a rate rise were David Blanchflower, Charlie Bean, Rachel Lomax and Paul Tucker.

David Page, economist at Investec, said: "The minutes are a big surprise and will make for very compelling reading.

"It was a much closer call for a January rate hike than we had anticipated."

He added: "It really does question the committee as a whole's commitment to the need to take rates higher.

"We had been forecasting a hike in February to 5.5% as the last in the cycle and ahead of reading through the minutes it questions whether that is going to take place."

Economic factors

After the news the pound fell against the dollar, but gilts, interest rate futures and UK equities gained as the narrow decision suggested borrowing costs may be close to their peak.

The Gross Domestic Product (GDP) figures showed that the UK economy grew at its fastest pace in two-and-a-half years during the last three months of 2006, boosted by demand for services.

GDP rose 0.8% in the fourth quarter from the previous three-month period, the Office for National Statistics said.

On an annual basis, GDP increased by 3% from the same quarter in 2005. The quicker-than-expected growth means another interest rates rise remains a possibility.




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