The Monetary Policy Committee's first meeting since Britain's austere emergency budget last month produced the expected 7-1 split in favor of keeping rates at a record low 0.5 percent, as lone hawk Andrew Sentance maintained his call for a 0.25 percentage point rise in rates.
More of a surprise to economists was the MPC's downbeat tone on growth, and the fact that arguments for a "modest easing" in monetary policy — in practice, an increase to the 200 billion pounds of quantitative easing already pumped into the economy — were discussed alongside the case for a "modest tightening."
"Clearly we have Sentance at one end of the spectrum but there's a broad range of views on the committee. But now they are clearly concerned about developments in the global economy and particularly the downside risks," said UBS analyst Amit Kara.
The MPC faces a dilemma. British inflation is still well above its 2 percent target after hitting a 17-month high of 3.7 percent in April. But the nascent economic recovery looks increasingly fragile as fiscal austerity becomes the watchword across much of Europe.
Before the minutes were released, most economists had not expected the BoE to raise rates before early next year, yet neither did many see a revival in the quantitative easing program that was paused in February.
So sterling fell and gilt futures turned positive on the news, as investors sensed policy tightening could be even further off than they thought.
"The voting arithmetic may indicate that a `hawkish' bias persists within the MPC but our interpretation of the July minutes is that there has been a dovish shift in the balance of opinion," said RBS economist Ross Walker.
"The `hawkish' contingent will be capped at two members and the underlying risks will shift in a dovish direction. By November, a three-way split is more likely than not."
DOWNBEAT ON GROWTH
The minutes were noticeably more downbeat on growth, saying prospects had worsened over the month, possibly into the medium term.
Forward-looking business survey indicators in Britain and overseas had weakened, and pressure in bank funding markets meant the availability of credit to firms and households was not improving as much as before, MPC members said.
Finance minister George Osborne's June 22 budget — which pencils in 25 percent cuts to most departmental spending — would probably slightly reduce growth, but averted the risk that a sharp spike in gilt yields could derail the recovery.
However, near-term inflation prospects had also worsened and consumer price inflation was likely to be higher in the rest of 2010 than envisaged in the May inflation report.
"In the light of the news over the month, it seemed likely that growth would be weaker than previously expected but, at least for a while, inflation was likely to be higher," the minutes said.
MPC member Adam Posen said in a Dow Jones interview published late on Tuesday that monetary policy could move either way, and the June budget would not make a significant difference to updated BoE forecasts due next month.
In the minutes, policymakers acknowledged the risk that persistently above-target prices rises could raise households' inflation expectations, but said there was little evidence of this happening so far, with wage growth remaining subdued.
Most members were happy on balance to leave the stance unchanged, confident that spare capacity in the economy would bring inflation back to target in the medium term once the effect of temporary factors had worn off.
Sentance said that a return to growth and a rebound in inflation meant the time for a rate rise was now.
