The Bank of England's Monetary Policy Committee was split this month over interest rates, with one member wanting a raise and another voting for a cut, while the remaining seven chose to keep them steady as both the inflation and economic growth outlook had turned more gloomy, minutes of the meeting showed yesterday.

The Bank of England's Monetary Policy Committee was split this month over interest rates, with one member wanting a raise and another voting for a cut, while the remaining seven chose to keep them steady as both the inflation and economic growth outlook had turned more gloomy, minutes of the meeting showed yesterday.

The official record of the July 9-10 policy meeting showed that hawk Timothy Besley wanted an immediate quarter-percentage point increase to 5.25%, while arch dove David Blanchflower argued that a cut was needed to keep the economy from tumbling into recession.

This produced the first three-way split on the direction of rates since May 2006 and 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, who had forecasted an 8-1 vote for steady rates this month, expect rates to remain at 5% before eventually falling as the economy loses pace.

However, sterling rose and bonds fell as the unexpected vote indicated there was little broad-based support for lower interest rates among policymakers.

If anything, members of the panel appeared more inclined to raise rates to defend their reputation as guardians of price stability, but they were also worried about the economic costs of such a move.

"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."

The minutes said there was little the Bank could do to tame inflation in the near-term, but also said that a rate rise this month could "send a strong signal that it (the Bank of England) was focused on inflation and remained determined to bring it back to target".

Arguing against a move that would have caught markets hopping, however, policymakers noted significant downside risks to the economy - and hence for inflation in the medium term.

"An increase in the current circumstances, when confidence was low and the financial sector fragile, could impart a downward momentum to the economy that risked a significant undershoot of inflation in the medium term," the minutes said.

Howard Archer, chief UK and European economist at consultants Global Insight, said the report underscores the dilemma faced by the Bank's policymakers, who are grappling with an economic slowdown and inflation at the same time.

"The three-way split in the MPC's voting in July encapsulates the predicament that the Bank of England is in over a deepening economic slowdown yet elevated and rising inflation.

"Indeed, the minutes note that the interest rate decision for all MPC members was a difficult one'. It is no surprise at all that David Blanchflower voted once again for an interest rate cut in July given his deep concerns about the risk of extended recession in the UK, while the hawkish Timothy Besley was always one of the most likely MPC members to favour a rate hike."

Archer added: "The minutes acknowledge that there has been bad news on both the inflation and growth fronts in recent weeks. Consequently, the upside risks to inflation in the near term were perceived to have risen, but so had the downside risks to growth and, hence, inflation over medium term."

Archer also said he expects base rates to remain steady for several months to come and a cut is still far away.

"Given that inflation seems set to (rise) near 5% later this year and is likely to still be above 4% at the end of 2008, the Bank of England will probably be reluctant to cut interest rates before 2009 unless the economy really falls off a cliff over the coming weeks.

"The Bank is likely to be particularly keen to see sustained evidence that wage moderation is continuing in the face of higher inflation levels and elevated inflation expectations. Further out, we expect interest rates to be cut significantly in 2009 and to come down to 4%, or even lower. This reflects our belief that the economy will be stagnant at best in the second half of this year and the early months of 2009."

MPC members noted that while official second-quarter GDP data due out tomorrow could turn out slightly stronger than expected, survey evidence and reports from the Bank's own agents suggested the economy was continuing to slow.

"Keeping (the) Bank Rate at 5% when the economy was slowing was arguably already sending a strong signal of the Monetary Policy Committee's commitment to reducing inflation," the minutes said.

"A rate change this month would be a surprise at a time when credit and other financial markets remained fragile, and any change in rates would be better communicated alongside the Bank's August Inflation Report."

Evidence of a sharply slowing economy continued to roll in yesterday, with banks reporting approvals for home loans tumbled by two thirds in June to a record low, pointing to further sharp falls in house prices in the next few months.

The Confederation of British Industry said optimism in the manufacturing sector was at its worst since 2001, although price pressures were at their strongest in more than 18 years.

The latest CBI Industrial Trends survey showed average unit costs rose for 65% of firms in the last three months, while they fell for just 7%.

The resulting balance of 58% is the highest reading since October 1980.

It comes in the wake of soaring oil prices, which reached a record $147 a barrel earlier this month. They have since fallen back by around $20 a barrel.