LONDON (Reuters) - Bank of England policymakers were surprised earlier this month that markets had not priced in a higher chance of an interest rate rise this year, minutes of their June 4-5 policy meeting showed on Wednesday.
BoE Governor Mark Carney shocked markets last week by saying that a rise in interest rates could come sooner than markets had expected, prompting traders to bring forward bets on when rates would rise to December of this year from around March 2015.
Wednesday's minutes showed that Carney's view was shared more widely on the nine-member Monetary Policy Committee. Members were concerned that markets had underestimated the chance of stronger-than-expected growth in the second half of 2014 eating up spare capacity in the economy.
"In that context, the relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising," the minutes said.
All members of the MPC voted to keep interest rates on hold at a record-low 0.5 percent. But as last month, some MPC members said the case for a rate rise was becoming more balanced.
The MPC said it still expected that rate rises, when they came, would be gradual and to a level well below their pre-crisis average.
The BoE said that its staff maintained their forecast for 0.9 percent economic growth during the current quarter, and now saw upside risks to their forecast of 0.7 percent for the third quarter of 2014, due to strong survey data.
There were signs of a slowdown in housing market activity, but it was unclear if this was a temporary effect due to lenders getting accustomed to new mortgage rules, or if the rules and other factors were having a longer-term effect.
The MPC said that low interest rates created risks to financial stability from the housing market, but that these were best addressed by the BoE's Financial Policy Committee in the first instance.
The FPC is due to publish recommendations next week.
Some economists had speculated that at least one policymaker might have voted for a rate rise, after a sharp change in tone from BoE Governor Mark Carney last week.
But Britain does not face immediate inflation pressures, with the headline rate of consumer price inflation dropping to a 4-1/2 year low of 1.5 percent in May and wage growth even slower.
The MPC minutes said one explanation of the persistent weakness of wage growth could be that the economy has more slack in it than previously thought.
Most members of the MPC continued to think that the amount of slack was equivalent to 1-1.5 percent of economic output, but said this estimate was uncertain.
Carney has also previously noted that the economy faced headwinds from high indebtedness, a strong currency and weak export markets, and some analysts think markets have overestimated the chance of an early rate move.
(Reporting by David Milliken and Andy Bruce))