The Bank of England has decided to keep interest rates unchanged at 0.25% as widely expected and revised its forecasts for growth and inflation.
In the minutes of the meeting it warned that growth would remain “sluggish” in the near term as the squeeze on households’ real incomes continues to weigh on spending.
The Monetary Policy Committee voted by a majority of 6-2 to maintain the Bank Rate at 0.25%, where it has been since last August.
The Bank will also continue with its programme of government bond purchases of £10 billion and corporate bond purchases of £435 billion.
The Bank also cut its growth forecast down to 1.7% down from 1.9% in May. Growth in 2018 is also expected to slow from 1.7% to 1.6%.
Inflation stood at 2.6% in June and the Bank expects the rate to remain above the 2% target throughout the three-year forecast.
UK inflation is forecast to rise further in the coming months, peaking around 3% in October before gradually dropping to 2.2% over the three-year forecast.
It blamed the overshoot on the effects of the referendum-related falls in sterling.
With average wage growth falling below the rate of inflation since May, the Bank has revised wage growth forecast for 2018 to 3%, down from 3.5% previously. For 2019, wages are expected to rise 2.25%, down from 3.75%.
In the minutes of the meeting the Bank said some tightening of monetary policy would be required to “achieve a sustainable return of inflation to the target” by a greater extent than the market is currently predicting.
The MPC forecast two rate hikes over the next three years, with the first not until the third quarter of 2018.
But all members agreed that any increases in Bank Rate would need to be at a “gradual pace” and “limited”.
The BoE has also brought an end to its Term Funding Scheme which was introduced to offer cheap funding to banks from February next year.
David Hollingworth from L&C Mortgages said: “Mortgage borrowers may feel that nothing has changed and so there is little need to do anything. However, those on variable rates remain vulnerable to a rate rise in future and those on standard variable rates continue to pay well over the odds. They should take advantage of the great rates on offer and potentially lock their rate down at the same time, to prepare for and buffer against any rate changes in future.
“Although the split in decision has dropped back to 6-2 in favour of a hold from 5-3, the fact remains that weaker growth and higher inflation will continue to put the squeeze on household budgeting. The Bank has also signalled that it will call time on the Term Funding Scheme, which was designed to make cheap money available to banks. That has certainly helped boost competition in the mortgage market but again underlines that rates won’t necessarily remain at the current lows forever.”
