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By Lee Wild

Date: Wednesday 20 Aug 2008

LONDON (ShareCast) - The Bank of England was split three ways at this month’s rate-setting meeting as policymakers mulled rampant inflation and gloomy economic prospects.

Minutes from the August 6-7 get together revealed that hawkish Professor Tim Besley once again voted for a quarter point hike in borrowing costs.

In an interview yesterday, Besley warned that bumper pay deals will force inflation higher and prevent the central bank from cutting interest rates.

He told the Sun newspaper that prices rises must be “nipped in the bud" in order to avoid the scenario of the mid-1970s when inflation topped 20%.

Last month, the professor became the first member of the BoE’s nine-strong Monetary Policy Committee to vote for higher rates in over a year.

Inflation is now at 4.4%, more than double the government’s 2% target and the highest since the Office for National Statistics began compiling figures 11 years ago, as the cost of food and energy continue to surge.

Perennial dove David Blanchflower called for a rate cut this time, while the other seven members including Governor Mervyn King favoured no change from the current 5%.

“The fall in oil prices, if sustained, would reduce some of the pressure on utility prices in the near term,” read the minutes.

“Pay growth had remained subdued. Some measures of inflation expectations had fallen back in July and the upside risk to inflation in the short term had probably eased a little over the month.”

A report from the central bank last week revealed it doesn’t expect the UK economy to grow at all over the next few years, but inflation should peak at 5% before falling next year.

That gave the City hope that interest rates will start to fall early in 2009.

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