The Bank of England has decided to keep interest rates on hold but warned of inflationary pressures ahead.
The Bank’s Monetary Policy Committee voted by a majority of 8-1 to maintain the Bank Rate at 0.25%, the first time since there has been a split decision since July.
The Bank will also continue with its programme of government bond purchases of £10 billion and corporate bond purchases of £435 billion.
Kristin Forbes, who leaves in June, voted for a 25 basis point hike to 0.50% after expressing concern about the potential inflation overshoot as a result of the ongoing resilience of the economy.
The Bank said it expects inflation to rise above 2% over the next few months, before peaking at around 2.75% in early 2018 and then drifting gradually back down towards the target rate.
It is the last decision on interest rates before the expected triggering of Article 50 later in the month and comes after the US Federal Reserve hiked interest rates by 0.25% to a range of 0.75% to 1.0%.
The Bank expects the economy to grow by 2% in 2017. However, it is expected to slow in 2018 with growth dropping to 1.6% as a result of the UK leaving the EU.
It said that retail sales have “weakened notably”, although other indicators of consumer demand such as consumer confidence have been steadier.
The minutes of the meeting said that with rising inflation and mixed evidence on slowing economic activity some members of the committee could vote for a rate rise in the future.
The minutes said: “Some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”
Howard Archer, chief economist at IHS Global Insight, said: “The Bank of England has highlighted that three developments that they will be closely watching in determining monetary policy – whether inflation expectations move significantly higher, pay growth remains limited and consumer spending slows as higher inflation erodes purchasing power.
“Latest developments in these areas in our view warrant ongoing BoE tolerance on the likely appreciable and prolonged inflation overshoot which is being driven by sterling’s weakness.
“However, given major uncertainties over the UK economic outlook nothing can be ruled out on the interest rate front.
“Clearly if growth does hold up pretty well, the less likely the BoEwill be to tolerate the inflation overshoot and could be prompted into hiking interest rates sooner rather than later.
“The MPC could also be prompted into an early raising of interest rates if second round inflationary effects increasingly materialise, especially if inflation expectations and wages do pick up appreciably.”
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