THE chances of an interest rate rise later in the year have certainly heightened in wake of publication of Bank of England governor Mervyn King's letter to Chancellor George Osborne yesterday.

But the letter seems to reveal more about the deep divisions within the Monetary Policy Committee (MPC) than any radical change in opinion about the best course of action from the governor himself.

It is only three weeks since Mr King delivered an unusually revealing speech in Newcastle in which he explained at length the competing pressures weighing upon the minds of the MPC in the current climate.

But anyone who listened to or read his speech that night will have been left in no uncertainty about the pre-eminent concern on his mind – ensuring that monetary policy does not play a part in knocking the tentative economic recovery off course.

Defending the MPC’s decision to ignore growing calls for an interest rate rise as the inflation rate spiraled in recent months, he said: “Of course it is possible to argue that the current recession should have been even deeper in order to keep inflation closer to target ... but that proposition is one few commentators seem willing to embrace,.”

Now, as figures reveal inflation rose to 4% in January, it seems there is a growing consensus that interest rates will have to go up in May with one or two further rises before the end of the year. The current 0.5% rate is widely expected to have at least doubled by then.

If that turns out to be the case, then it suggests Mr King has had a sudden change of heart about how the MPC can best help guide the economy through the choppy waters it currently faces. In particular, it would deeply contradict his argument made in his Civic Centre speech that the driving forces of higher inflation at the moment – higher import prices and rising energy costs – cannot be countered using monetary policy.

Unless there is evidence that increasing wage settlements are contributing towards the inflationary pressure – and there’s limited evidence of this to date – it is hard to see how yesterday’s figures will have changed his opinion that it is best to keep interest rates as low as possible.

Which raises the possibility that Mr King may be losing support around the MPC table.

With the markets increasingly betting on a rate rise and the full effect of the VAT rise expected to be seen in February’s inflation figures, Mr King could find his position increasingly isolated.

:: Andrew Hebden - The Voice of nebusiness - andrew.hebden@ncjmedia.co.uk