The Monetary Policy Committee considered a half-point hike in UK interest rates before increasing them from 5.25% to 5.5% two weeks ago, minutes of its May 9 and 10 meeting revealed yesterday, fuelling expectations of a further rise in borrowing costs soon.

It emerged in the minutes that the committee, chaired by Bank of England governor Mervyn King, voted nine-to-nil for the quarter-point rise in base rates two weeks ago. This was the fourth such increase since the monetary tightening phase began in August last year.

Arch-dove David Blanchflower, the external MPC member who voted unsuccessfully for an immediate cut in rates in March when stock markets were tumbling and opposed the previous three rises, confounded some forecasters by voting for this month's increase.

Sterling leapt in the wake of the minutes as interest rate expectations hardened further. The pound was last night trading at $1.9880, up more than 1.3 cents on its close in London on Tuesday. The euro was down about 0.35p around 67.82p.

The May 10 rate call was based on the MPC's latest quarterly inflation report, published last week.

This put annual UK consumer prices index inflation at the MPC's 2% target on its chosen two-year time horizon assuming market interest rates which at that time factored in a rise to 5.7% by the third quarter. It thus fuelled City expectations of another rise in borrowing costs by late summer.

The minutes yesterday reinforced forecasts of another rise, stating: "The committee agreed that, should the economy continue to develop broadly in line with the central expectation, Bank (base) Rate could be raised further as necessary."

Lucy O'Carroll, director of research at banking group HBOS's treasury services division, said: "Against the background of recent criticism over its communications strategy, this is as clear an indication of intent as the MPC has given for some time."

The statement in the minutes implies ever more limited scope for 5.5% to be the peak in base rates this cycle, and seems to signal only a speedy and significant softening of economic data might avert another increase.

Many economists now see another quarter-point rise in rates by August, with the more hawkish commentators claiming the MPC might implement a back-to-back increase at the end of its next monthly meeting on June 7.

Detailing the MPC's deliberations on May 9 and 10, the minutes state: "The committee's medium-term forecast (for CPI inflation) was consistent with some immediate rise in interest rates. For some members, the question was whether Bank Rate should be increased by 25 basis points or whether there was a case for a rise of 50 basis points - given the upside risks to inflation over the medium term and the buoyant outlook for growth and demand.

"The May Inflation Report forecast was conditioned on the market's expectations of interest rates - which implied an immediate increase of 25 basis points with a high probability of another rise later in the year. If the committee had been reasonably confident about the need for another interest rate rise soon, then a strong case could have been made for an increase of 50 basis points this month. But those members who had considered voting for 50 basis points preferred to wait for more data to assess the impact of past increases in Bank Rate.

"Some members argued that, given the uncertainties around both the outlook for inflation and the impact of interest rate changes, it was better to move cautiously. Other members were concerned that any excessive movement in rates could create downside risks to growth and so to the medium-term outlook for inflation."

O'Carroll noted only the last of these views, which she believed most likely to be held by Blanchflower and Bank of England deputy governor Rachel Lomax, "seems to contain a presumption against further rate increases".

Jonathan Loynes, chief European economist at Capital Economics and one of the more hawkish forecasters, predicted after publication of the minutes that base rates would hit 6% this summer and would not fall quickly thereafter.

He said: "Barring a significant change in the tone of the data, it now looks likely that interest rates will rise again to 5.75% in June. There are strong parallels here with 2004, when a 50 (basis point) move was likewise discussed in May, but no members actually voted for one, and rates were raised again in June."

Loynes added: "Having warned in recent weeks of a growing likelihood that interest rates would ultimately reach 6%, we have now pencilled in a move to that level in August. After all, the inflation report suggested that, even on the basis of 5.75% rates, the risks to the inflation target would remain on the upside. And, for what it's worth, rates rose again in August 2004 after the back-to-back hikes in May and June (that year)."

He said Capital had "some concerns over what impact this higher profile for interest rates might eventually have on the real economy, particularly the property markets".

However, Loynes added: "With overall economic activity likely to remain pretty solid in the foreseeable future, and the MPC's inflation concerns unlikely to disappear for some time, we see little prospect for now that interest rates will come back down again quickly next year. We have now pencilled in just one cut in rates at the end of next year."

The minutes also show MPC members found it "perhaps puzzling that US equity prices had been so strong given the mixed news about the US economy".

New York's Dow Jones Industrial Average has been hitting fresh all-time records with high frequency this year.

MPC members noted UK mortgage lending growth appeared to be slowing, but that house prices continued to rise. They highlighted the fact that increased adoption of fixed-rate mortgages had meant the three previous quarter-point rises in base rates had not been reflected fully in the cost of home loans.

They also highlighted a seeming lack of spare capacity within firms. However, on a more reassuring note, MPC members said inflation expectations "did not appear to have become dislodged".

Annual CPI inflation leapt to 3.1% in March, triggering the first letter of explanation from a Bank of England governor to a UK chancellor, in this case Gordon Brown, since this explanatory mechanism was introduced with the MPC's formation in 1997. It dipped to 2.8% last month.