Bank of England policymakers have stuck to their plan to only start raising interest rates next spring despite pressure to act due to the rising housing market and the economic recovery.
Governor Mark Carney defended the central bank's decision as it issued its latest inflation report, with no change to plans to start lifting interest rates from the second quarter of 2015 as the economic recovery takes hold.
"The economy has started to return to normal", he told reporters, adding that interest rates were likely to remain low "for some time". Carney made clear that the Bank was "very aware" of the pressures on those Britons who would stand to be affected by an interest rate rise.
The Bank also upped its growth forecast for the UK to an average of 3% over the following years. The Bank reiterated that any interest rate rise would be done "gradually", predicting that interest rates would rise from 0.5% to 1.2% next year, then 2% in 2016, still markedly below the 5% average over 1998-2007.
The Bank justified its decision as it warned that sustained economic growth has "not yet been accompanied by a material pickup in productivity". Continued lacklustre productivity could hamper the economic recovery and render it "unsustainable", it warned.
However, the Bank's inflation report revealed that policymakers had decided over the last three months in light of the speed of economic recovery that the degree of spare capacity - the amount of unfulfilled productivity the Bank is looking to close before raising interest rates - in the economy had narrowed.
Despite this, the Bank's rate-setters did not change their estimate that the amount of spare capacity, known as the output gap, amounted to around to 1 to 1.5% of gross domestic product.
"Although the margin of spare capacity has probably narrowed a little since [February], the Bank's MPC [Monetary Policy Committee] continues to judge that there remains scope to make greater inroads into slack before raising Bank rate," the inflation report read.
In the latest minutes from the Bank's MPC meeting released last week, policymakers kept interest rates at 0.5%, which has remained at the historic low for more than five years.
Jeremy Cook, chief economist at the currency company World First, said: “Monetary policy has been held once again this month, as the MPC continues to plough a furrow of inaction."
Cook said that he expected interest rates to remain at their 0.5% historic low "for around 12 months", adding: “But that does not mean that dissenting voices on a number of issues will not come to the fore earlier."
Meanwhile, new figures out today revealed that the number of people out of work fell over January to March by 133,000, to just 2.2 million. This accounts to an unemployment rate of 6.8%.
The Bank's decision comes as economists have warned about the state of the UK's rising housing market. The Organisation for Economic Co-operation and Development (OECD) warned that action may be needed to cool the housing market, suggesting that George Osborne's flagship Help to Buy mortgage guarantee scheme should be restricted.
The OECD said the minimum requirement put down by homebuyers under the initiative ought to be increased.
Bank of England deputy governor Sir Jon Cunliffe warned that the surging property market could pose the biggest danger to the country's financial stability.
Sir Jon Cunliffe said it would be "dangerous to ignore the momentum that has built up in the UK housing market".
The Bank has already tried to put the brakes on by withdrawing the Funding for Lending scheme, which widened access to mortgages last year by giving lenders access to cheap finance. It has been redirected purely to business loans.
