Bank split three ways on interest rates path

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - One Bank of England policymaker wanted to raise interest rates this month and another wanted a cut, but the remaining seven chose to keep them steady as both inflation and economic growth prospects had worsened.

Minutes of the July 9-10 policy meeting published on Wednesday showed hawk Timothy Besley wanted an immediate quarter percentage point increase to 5.25 percent, while dove David Blanchflower argued a rate cut was needed to prevent recession.

This produced the first three-way split on the direction of rates since May 2006. Policymakers said the decision was "a difficult one" as inflation was likely to turn out higher and growth lower than the Bank had forecast in May.

Analysts had expected an 8-1 vote for steady rates this month, with Blanchflower wanting a cut. Most argue rates will stay put for now before falling eventually as the economy slows.

A Reuters poll of 70 economists on Wednesday showed a growing risk of recession. Analysts say there is a 40 percent chance of two straight quarters of contraction in the next year, with rates set to fall to 4.25 percent by the end of 2009.

However, sterling rose and bonds fell as the unexpected split Bank vote indicated there was little broad-based support for lower interest rates. If anything, members of the Monetary Policy Committee appeared more inclined to raise rates.

"The minutes are certainly more hawkish than we expected," said Philip Shaw, chief economist at Investec. "The committee gave serious consideration to tightening policy this time round.

"The outlook for interest rates looks more uncertain."