The Bank of England's Monetary Policy Committee voted unanimously to keep monetary policy unchanged this month, but some members noted an increase in upside inflation risks due to the fall in the pound.
Minutes of the MPC's March 3-4 meeting, published on Wednesday, showed all nine members agreed to keep interest rates at a record low of 0.5 percent and leave the 200 billion pound quantitative easing programme unchanged.
Although policymakers still expected the weak economy to bear down on inflation in the medium term, there were signs that some are starting to worry that it might not fall as quickly as they had hoped.
"Members drew different inferences about how the balance of risks to inflation was evolving," the minutes said. "Some members considered that the upside risks to inflation had increased slightly over the month; others felt that the balance of risks had not changed materially."
The minutes were in line with analysts' expectations and market attention was taken up by news of an unexpected fall in unemployment benefit claims. Nonetheless, some analysts reckoned some on the MPC were now taking more account of the risk that inflation might not fall as fast as they had expected.
"You've got to be careful not to exaggerate it, as the differences are quite marginal, but there seems to be less unanimity," said Ross Walker, economist at RBS.
"I just wonder if they're preparing the ground for an escape route if they need it. I don't think anyone's too worried about where CPI peaks in Q1, it's more there's a focus on how quickly it falls back."
Inflation surged to 3.5 percent in January — more than a full percentage point above the BoE's target and obliging BoE Governor Mervyn King to explain the move in a public letter to the government.
PUBLIC EXPECTATIONS
The minutes said policymakers thought it "increasingly likely" that inflation would remain well above target in the months ahead, though they still expect it to fall back once upward pressure from a rise in value-added tax, higher oil prices and the past fall in sterling wear off.
On the other hand, the pound has fallen again in recent weeks, and policymakers said this could put further pressure on inflation and feed through into the public's price expectations.
"If it persisted, the recent further depreciation of sterling was likely to put additional upwards pressure on inflation over the next few quarters," the minutes said.
"Against that background, there was a risk that the public's expectations of inflation over the medium term might begin to rise. The Committee would keep under close review the extent to which these shocks to the price level were feeding through into inflation expectations."
The MPC said recent activity indicators painted a mixed picture, and that despite upbeat surveys in February, data were likely to remain volatile due to the impact of the cold weather and tax changes.
"It was nevertheless clear that output was, and was likely to remain, well below capacity for an extended period."
"Given that outlook, Committee members continued to expect that a significant margin of spare capacity in the economy was likely to bear down on inflation, once the temporary impact of shocks to the price levels had worn off."
In addition, it was likely to take some time for exporters to feel the benefit of the weak pound, due to uncertain growth prospects in Britain's main export markets, the minutes said.
