One Bank of England policymaker voted to raise interest rates from their record low this month in a surprise split with the majority for leaving policy unchanged, prompting speculation of a rate hike this year.
Sterling surged half a cent against the dollar and short sterling futures tumbled as investors reckoned the first call for a rise in nearly two years threatened bets official borrowing costs would stay on hold until 2011.
But analysts said that especially after the new government on Tuesday delivered the most austere budget in a generation, it was unlikely that other members of the Monetary Policy Committee would support policymaker Andrew Sentance quickly.
"The UK is struggling to recover from the deepest recession in at least 30 years and now is not the time to raise the heat on monetary policy, when fiscal restraint is going to be significant," said Peter Dixon of Commerzbank.
"My guess is that Sentance will remain in the minority for some time to come."
The Monetary Policy Committee minutes published on Wednesday showed rate-setters believed demand momentum could be stronger than previously thought, and that they were split on the extent to which spare capacity left over after Britain's deep recession would bear down on inflation.
Sentance voted for rates to rise to 0.75 percent from their record low of 0.5 percent, though he backed the MPC's unanimous vote to keep the stock of quantitative easing purchases steady at 200 billion pounds ($296 billion).
The move puts the former British Airways chief economist on a collision course with BoE Governor Mervyn King, who stressed last week how monetary policy had to take account of fiscal tightening and financial fragility.
"The clearer divisions that had opened up since the end of last year were going to prompt somebody to vote for a hike, but we didn't think that would be until August at the earliest," said Ross Walker, an economist at Royal Bank of Scotland.
ABOVE TARGET
A big question remains how the MPC will react to finance minister George Osborne's austere budget, which will dent growth by slashing government spending by a fifth over five years and push up inflation next year with a sales tax rise.
But in their June 9-10 meeting — before Tuesday's budget — there were signs that it was not just Sentance who was worried about the failure of British inflation to fall as rapidly as that in the United States and the euro zone.
"Reading the minutes as a whole, the balance of opinion has edged in a more hawkish direction," Walker said.
Sentance's was the first call for a UK rate rise since August 2008, and it was the first split decision since November when one policymaker called for more quantitative easing than was ultimately agreed.
He argued that inflation had proved resilient in the aftermath of Britain's deep recession, casting doubt on the BoE's prediction that spare capacity would be enough to bring inflation back to target.
Consumer price inflation hit a 17-month high of 3.7 percent in April, and fell only to 3.4 percent in May, remaining well above the central bank's 2 percent target.
The central view in the BoE's May Inflation Report was that British inflation had been temporarily lifted by a rise in sales tax in January and the lingering effects of currency weakness, and that CPI was on track to return to target by early 2011.
The BoE also noted that the momentum for demand might be stronger than previously thought, with recent indicators suggesting that underlying GDP growth was only a little below average in the first half of 2010.
Short-term public inflation expectations were rising, but the BoE saw enhanced downside risks to growth and inflation from ongoing sovereign debt worries in the euro zone and the region's acceleration of fiscal tightening.
MPC members will be mindful of the last time the BoE considered raising rates in the summer of 2008, when inflation was accelerating due to an oil price spike and Britain appeared to have escaped the U.S. subprime crisis relatively unscathed.
The central bank opted not to raise interest rates — fortuitously, as Lehman Brothers' collapse in September caused an even sharper downturn to the world economy.
The normal nine-member MPC was down to eight this month, because a replacement for Kate Barker, who left at the end of May, has yet to be found.
