The Bank of England has signalled it may hike interest rates in the “coming months” to cool surging inflation as economic growth shows signs of picking up.
Members of the Bank’s nine-strong Monetary Policy Committee voted 7-2 to keep interest rates on hold at 0.25%, as widely expected.
But the Bank gave its strongest signal yet that a rate hike is on the horizon as it said all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
It also reiterated that rates may need to rise by more than expected in financial markets.
In minutes of its latest rates decision, the Bank said there was a “slightly stronger picture” for the economy since its forecasts last month thanks to signs of a firmer housing market, stronger employment and a rebound in retail and new car sales.
Meanwhile, Brexit-fuelled inflation is set to climb above 3% in October – higher than the Bank previously expected.
It raised the prospect of a potential rate rise as soon as November, as it said it would “undertake a full assessment of recent developments” at the time of its next quarterly inflation report in two months.
The minutes showed that while two MPC members – Ian McCafferty and Michael Saunders – repeated their call for an immediate rise to 0.5% in the latest decision, the majority of members thought the outlook for growth was still unclear.
In the minutes, the Bank said: “While there had been some signs of growing momentum in activity into the second half of the year… it was too soon to judge whether stronger consumption growth would be sufficient to offset continuing weakness in business investment.
“It was also unclear how sustained any increase in gross domestic product growth might be over the medium term.”
Sterling rose sharply after the rates meeting minutes, gaining 0.5% to 1.33 US dollars.
Versus the euro, the pound was trading 0.4% up at 1.11.
Brexit-fuelled inflation is set to climb above 3% in October (Yui Mok/PA)
The decision comes after official figures on Tuesday showed Consumer Prices Index (CPI) inflation rose by more than expected to 2.9% in August as the effects of the Brexit-hit pound continue to feed through.
This has been putting the squeeze on British households as pay growth remains muted, with the latest figures on Wednesday revealing real pay was 0.4% lower annually – once inflation is taken into account.
Growth has been muted at 0.3% in the second quarter, although the Bank said consumer demand was set to be stronger in the current quarter, while the Brexit-hit pound would boost exports.
However, it warned there “remain considerable risks to the outlook” amid uncertainty caused by Brexit negotiations.
The minutes also showed that new MPC member and deputy governor Dave Ramsden sided with governor Mark Carney and deputy governor Ben Broadbent in voting to hold interest rates.
A senior civil servant and Treasury veteran, Mr Ramsden was appointed as the new deputy governor for markets and banking in July following the departure of Charlotte Hogg.