The Bank of England's Monetary Policy Committee unanimously voted to raise interest rates two weeks ago with some members arguing that sterling's strength should not affect policy, reinforcing expectations of more hikes ahead.
The release of the minutes of the February 4 and 5 meeting immediately sent the pound soaring to $1.9140, its highest since the run-up to Black Wednesday in September 1992 when sterling crashed out of the European Exchange Rate Mechanism.
The minutes showed the MPC agreed that a quarter-point rate hike to 4% was needed to ensure inflation would not exceed its 2% target in two years but the real surprise was some members' seeming nonchalance about the exchange rate.
Some economists had argued in the run-up to the February meeting that the pound's rise could prevent the BoE from raising rates for the second time in three months because of the dampening effect it would have on inflation and growth. But the minutes revealed no such anxiety.
For at least some of the MPC, sterling's rise between November and February should be treated as a one-off effect on inflation and should be 'disregarded' in setting interest rates. Members also argued that not raising rates when a hike was so expected could depress sterling, removing its dampening effect on inflation.
The minutes also showed the MPC will tread carefully before hiking again because it remains worried about consumers' sensitivity to higher borrowing costs given record debt levels.
