By Sumeet Desai and Matt Falloon
LONDON (Reuters) - Bank of England policymakers considered the case for both easing and tightening policy this month, before voting eight to one to keep interest rates at a record low of 0.5 percent, minutes showed on Wednesday.
Monetary Policy Committee member Andrew Sentance called for a 25 basis point rate hike for the third month running, minutes of the BoE's August 4-5 meeting showed.
But the majority of the Committee thought it would be best to keep interest rates on hold and maintain the central bank's 200 billion pound asset purchase scheme because of significant risks on both sides of the inflation outlook.
"These members stood ready to respond in either direction as the balance of risks evolved," the minutes said.
The August minutes reinforced expectations that interest rates will remain on hold well into next year.
"The tone of the discussion suggests that the MPC is firmly in neutral mode," said Philip Shaw, an economist at Investec.
The BoE cut interest rates to a record low in March last year and embarked on an unprecedented quantitative easing programme to pull Britain out of its deepest recession since World War 2.
While the economy has started to grow again, most analysts anticipate a slow and difficult recovery, weighed down by swingeing budget cuts by the new coalition government.
There had been some speculation on markets that the bank could have been split three ways -- meaning that one or more members voting for further quantitative easing to support the recovery -- and sterling rallied when the minutes gave no sign of that. Gilts also pared gains slightly.
PRICE WORRIES
The MPC considered arguments in favor of further monetary easing because credit conditions looked as if they would remain tighter than the central bank had anticipated in May. The government's budget in June had also cut the growth outlook and a weakening in business and consumer confidence might also weigh on activity.
Sentance, however, argued that the recovery was already gathering momentum and there was a risk that inflation expectations could become de-anchored.
Inflation has been surprisingly strong this year, posting a rate of 3.1 percent in July, which forced BoE Governor Mervyn King to write a public letter of explanation to the government for the third time this year.
In his letter, he repeated that he expected inflation to fall over the next two years and blamed one-off factors such as a rise in VAT sales tax and the effect of sterling's previous weakness.
The minutes, however, showed that policymakers are worried that a recent spike in wheat prices could feed through to higher consumer prices this year.
"Increases in the prices of some agricultural commodities in the days leading up to the meeting suggested that the increased volatility of CPI inflation seen in recent years might continue," the minutes said.
The MPC was encouraged by surprisingly strong growth in the second quarter of this year and said manufacturing was likely to remain strong in the third quarter, although some of the economy's strength had probably been erratic.
The economy grew 1.1 percent in the second quarter -- almost twice the rate expected.
(Editing by Patrick Graham)
