Borrowers could be in line for an interest rate rise as soon as November after the Bank of England signalled it may hike borrowing costs in the “coming months”.
The pound rocketed to its highest level against the US dollar for a year after the Bank gave its strongest signal yet that a rate rise is on the cards to cool surging inflation and 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 minutes of the latest rates decision showed all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
The Bank also reiterated that rates may need to rise by more than expected in financial markets.
The minutes 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 in 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.
Sterling rose sharply after the rates meeting minutes, jumping 1.1% higher to 1.34 US dollars and 1.2% up at 1.12 euros.
A rate rise would come as a blow to millions of homeowners after 10 years of record low borrowing costs.
But some economists remained sceptical over an imminent hike, given Brexit uncertainties.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “We continue to think that GDP growth and domestically generated inflation will be too weak for the MPC to raise rates over the next year, but it’s clear now that it would not take much of an improvement in either to spark the MPC into action.”
Andrew Sentance, senior economic adviser to PwC and a former MPC member, warned over a shock to the economy if the Bank does not act soon to raise rates.
He said: “By continually delaying the first move in this direction, there is an increasing risk that when interest rates do start to rise, it will take consumers and borrowers by surprise.”
The decision comes after official figures on Tuesday showed inflation rose by more than expected to 2.9% in August as the effects of the Brexit-hit pound continued 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.
The Bank has been reluctant to raise rates to dampen inflation while growth has been meagre, at 0.3% in the second quarter, although the MPC minutes showed a brighter outlook with consumer demand and exports set to strengthen.
However, it warned there are still “considerable risks to the outlook” amid uncertainty caused by Brexit negotiations.
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 it was “too soon to judge whether stronger consumption growth would be sufficient to offset continuing weakness in business investment”.