The prospect of a pre-Christmas increase in interest rates rose after two members of the Bank of England‘s key policy-making body broke ranks and voted for higher borrowing charges.

City dealers said it was possible that rates could be lifted from their emergency level of 0.5% by the end of the year, as three years of unanimous 9-0 decisions at Threadneedle Street ended with Martin Weale and Ian McCafferty calling for the cost of borrowing to be raised by 0.25 percentage points.

Although the remaining seven members of the monetary policy committee (MPC) opted to leave official interest rates where they have been since March 2009, the split vote surprised financial markets and intensified speculation about the timing of the first upward move by the Bank.

Brian Hilliard, economist at Société Générale, said: “The market is fully pricing in the first hike in February 2015, which remains our call. There is of course some risk of a November 2014 move, given that cracks have now appeared in the MPC consensus.”

Details of the split on the MPC came from the minutes of the committee’s meeting on 7 August, which were released yesterday. The pound rose on the foreign exchanges amid speculation that a rate rise could now come earlier than expected, although some analysts pointed out that the economic news since early August had been less supportive of rapid action.

“The minutes of August’s MPC meeting, revealing the first split interest rate vote since July 2011, indicate that a 2014 rate hike cannot be ruled out,” said Samuel Tombs, senior UK economist at Capital Economics. “But the low inflation outlook suggests the odds are still in favour of a delay until early next year.”

According to the minutes, the two dissenting MPC members said the state of the economy justified an immediate rise in the bank rate: “These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up. They noted that it was possible that wages were lagging behind developments in the labour market to some extent.

“If that were true, wages might not start to rise until spare capacity in the labour market were fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank rate in advance of them.”

Interest rates have been pegged at 0.5% – the lowest level in the Bank’s 320-year history – since the deep recession during the winter of 2008-09, but McCafferty and Weale said that even after their proposed 0.25-point rise policy would be highly supportive of growth. An early rise would help ensure that increases in borrowing costs were gradual.

The Bank’s governor, Mark Carney, had signalled a split on the MPC during last week’s inflation report press conference, in which he said that there were differing views on the committee about the amount of slack still remaining in the economy following the deep recession of 2008-09.

But he was among the majority on the committee that decided “there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank rate”.

Those voting for no change in August said “growth was likely to ease a little as the boost from pent-up demand released by the easing in credit conditions and lifting of uncertainty faded. This would slow the pace at which slack was being eroded. Wage growth remained weak, suggesting that slack in the labour market might have been greater than previously thought.

“In addition, increases in Bank rate well ahead of any pickup in wage and income growth risked increasing the vulnerability of highly indebted households. Finally, an unexpected increase in Bank rate might cause sterling to appreciate further, bearing down on inflation and further impeding UK economic rebalancing.”

, economics editor, The Guardian

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