Some Bank of England policymakers considered rate rise

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Minutes of the Monetary Policy Committee's June 4-5 meeting showed arch-dove David Blanchflower maintained his call for a quarter-point interest rate cut but the rest thought there was no case for that given the worsening inflation outlook.

Policymakers, however, left the door open for a cut once they got more information on the economy. Some MPC members thought there was a case for an immediate rate hike but decided against it because of signs the credit crunch is now hitting the wider economy.

"While a rate hike in coming months is possible we continue to see the majority of the MPC favouring rates on hold," said Michael Hume, economist at Lehman Brothers.

"We still expect growth concerns to gradually dominate the MPC's thinking and so still expect a rate cut later this year, most likely in November."

Figures out on Tuesday showed inflation hit 3.3 percent in May, the highest since the Labour government came to power in 1997, forcing Governor Mervyn King to write to the government explaining why.

In his letter King calmed market nerves over imminent rate hikes, saying policymakers had to balance short-term price pressures against the risk of a sharply slowing economy pulling inflation below the 2 percent target in two years.

Blanchflower, the lone voice in favour of a rate cut, said there was a growing risk of the economy turning down very sharply, though recession was not his central forecast.

FACTORY ORDERS IMPROVE

News on the economy has been bleak in recent weeks and the Bank policymakers noted that housing market conditions had "deteriorated sharply" and the effects of the global credit crunch were still working their way through the economy. Chancellor Alistair Darling will tell the annual Mansion House dinner of City of London financiers later on Wednesday that the country's economic policy framework was facing its biggest test in years, said Treasury officials.

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