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Bank of England policy makers defeated David Blanchflower's call for an interest-rate cut this month as the threat of inflation intensified, prompting some of them to consider an increase.

The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to keep the benchmark rate at 5 percent, minutes of the June 5 decision showed. Blanchflower voted for a quarter-point reduction, arguing that there was a small, but growing risk of a “very negative outcome.''

Inflation reached 3.3 percent in May, prompting King to write a letter of explanation to the government this week for only the second time in more than a decade. He said policy makers are “concerned'' about increases in consumer prices, inflation may exceed 4 percent this year, and the future path of interest rates is “uncertain.''

“Most members concluded that developments this month had meant that the risks to inflation in the medium term had moved further to the upside,'' the minutes said. “For some members the news had been sufficient to consider whether an immediate rise in bank rate was warranted.''

At 5 percent, the Bank of England's benchmark rate is still the highest rate in the Group of Seven industrialized nations. The U.K. central bank last lowered the main rate in April, bringing the total number of rate cuts to three since December.

The pound stayed lower against the dollar and the euro after the report. The U.K. currency traded at $1.9522 at 10:22 a.m. in London, from $1.9568 yesterday. It was at 79.37 pence per euro.

`On Hold'

“There's a sense that rates are more likely to be on hold over coming months than anything else,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. “If the Bank of England is forced to move before the end of the year, that move is going to be a hike.''

The policy makers who considered a rate increase decided against one, because it wasn't required “urgently'' to keep inflation expectations in check and may appear to exaggerate the panel's concerns about prices cash advance loan no fax instant payday loan.

Britons anticipate inflation will reach 4.3 percent in the next year, the highest reading since at least 1999, the central bank said last week, citing a May survey by GfK NOP.

Crude oil prices surged to a record above $139 a barrel On June 16 and corn climbed to a record near $8 a bushel. Higher commodity prices pose a “serious challenge'' to the world economy, officials from the Group of Eight nations said June 15. U.K. food prices increased 8.7 percent from a year earlier, the statistics office said yesterday.

Governor's Letter

King wrote his letter to Chancellor of the Exchequer Alistair Darling because inflation strayed above 3 percent to the highest since at least 1997. It is only the second a governor has written since the central bank took control of monetary policy 11 years ago. The bank published the letter yesterday.

British law requires the central bank governor to write a letter of explanation if inflation strays more than 1 percentage point from the 2 percent target. King wrote the first letter in April 2007 after inflation quickened to 3.1 percent.

Falling house prices and higher credit costs are curbing consumer spending, and denting Britons' confidence in the economy. King said it's “quite possible we will get an odd quarter or two of negative growth'' as he presented the bank's forecasts last month.

Blanchflower argued that evidence of slowing growth “more than outweighed'' the news about short-term inflation. He repeated his call for an interest-rate cut, saying that the impact of declining house prices on consumer spending was likely to be more than the bank predicted.

“There's a very real risk that the U.K. economy could fall into a recession, and that would paralyze the financial markets in the middle of a G-7 credit crunch that is not going away,'' Lena Komileva, an economist at Tullett Prebon in London, said in an interview on Bloomberg Television.

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