The Bank of England's Monetary Policy Committee unexpectedly voted 8-1 to keep interest rates at 5.25% in March, with David Blanchflower wanting an immediate 25 basis point cut, minutes showed on Wednesday.
Financial markets had expected a repeat of last month's 7-2 vote with Timothy Besley and Andrew Sentance again going for an increase, especially because of strong inflation data on Tuesday which sent interest rate futures sharply lower.
Rate futures rallied after the minutes' release as investors scaled back expectations of higher rates, while sterling fell and Britain's FTSE 100 index of leading shares extended gains.
"This outcome has clearly reduced the likelihood of a near-term rate hike, but we still feel one is more likely than not," said James Knightley, an economist at ING. "The Bank of England still admit that medium term risks are still on the upside and the near term outlook for growth remains strong."
The minutes of the March 7-8 meeting showed the committee was content to leave rates unchanged this month based on the balance of risks, but said the short-term outlook for inflation was now slightly lower than in the February inflation report.
Risks to inflation in the medium term remained on the upside, most members felt, due to capacity constraints, strong price intentions among businesses and strong money supply growth. The majority was also worried that any change in borrowing costs could spook already volatile financial markets.
"The financial market volatility added to the case for holding rates this month," the minutes said. "An unexpected move by the Committee could provide an unwelcome addition to theuncertainty and volatility in financial markets."
NO WAGE/PRICE SPIRAL?
Policymakers saw a number of downside risks to inflation emerging and said their concerns that higher inflation would trigger a wage-price spiral had not been realised. "The upside risk to inflation from wage growth might have started to diminish," the minutes said.
The MPC agreed there was a more subdued picture of underlying consumer spending and developments in the housing market might also be a signal that house price inflation was starting to ease.
On the upside, the MPC judged the net impact of recent market moves such as a fall in the sterling exchange rate index might be to "push up the inflation projection a little."
The MPC also expected GDP in the first quarter to be as strong as expected at the time of the February inflation report.
But for Blanchflower the balance of news had been sufficiently to the downside to justify lower rates. He highlighted considerable evidence of spare capacity in the labour market and benign wage pressures.
He felt 75 basis points of monetary tightening since August had started to weigh on consumer and housing market activity and said the service sector showed signs of weakening.
"Inflation was likely to decline faster in the short term than in the Committee's central projection," the minutes reported Blanchflower as saying.