Bank of England rate-setters mulled the case for both easing and tightening policy this month before voting eight to one to keep interest rates at a record low of 0.5%, minutes showed on Wednesday.
Monetary Policy Committee member Andrew Sentance called for a 25 basis point hike for the third month running, minutes of the BoE's August 4-5 meeting showed.
New MPC recruit Martin Weale did not rock the boat, joining the majority of the Committee who thought it best to keep rates on hold and maintain a 200 bln pound asset purchase scheme because of big risks on both sides of the inflation outlook.
"These members stood ready to respond in either direction as the balance of risks evolved," the minutes said, citing fresh concerns that a recent spike in wheat prices could feed through to consumer prices this year.
There had been some market speculation the BoE vote could have been split three ways — meaning one or more members voting for further quantitative easing to support the recovery — and sterling rallied when the minutes gave no sign of that. Gilts also pared gains slightly.
The August minutes, which reflected much of last week's central bank quarterly inflation forecasts, reinforced expectations that interest rates will remain on hold well into next year despite this year's stubborn price pressures.
"The tone of the discussion suggests that the MPC is firmly in neutral mode," said Philip Shaw, an economist at Investec.
The BoE cut interest rates to a record low in March last year and embarked on an unprecedented quantitative easing programme to pull Britain out of its deepest recession since World War 2.
While the economy has started to grow again, most analysts anticipate a slow and difficult recovery, weighed down by brutal budget cuts by the new coalition government.
PRICE WORRIES
However, the MPC did consider arguments in favour of further monetary easing because credit conditions looked as if they would remain tighter than the central bank had anticipated in May.
The government's budget in June had cut the growth outlook and a weakening in business and consumer confidence might also weigh on activity, the MPC said.
But Sentance argued it was time to start removing some of the emergency stimulus measures put in place last year because the recovery was gathering momentum and reiterated his fear that inflation expectations could become de-anchored.
Inflation has been surprisingly strong, posting a rate of 3.1% in July, which forced BoE Governor Mervyn King to write a public letter of explanation to the government for the third time this year.
In his letter, he said he expected inflation to fall over the next two years and blamed one-off factors such as a rise in VAT sales tax and the effect of sterling's previous weakness.
However, policymakers at the central bank, which targets inflation at two percent, have been surprised by how resistant price pressures have been.
The MPC was encouraged by surprisingly strong growth in the second quarter of this year and said manufacturing was likely to remain strong in the third quarter, although some of the economy's strength had probably been erratic.
The economy grew 1.1% in the second quarter — almost twice the rate expected.
