The Bank of England has held interest rates at 0.25% but said a rate rise “over the coming months” was possible if the UK economy continues on its current trajectory.
In particular, they pointed to August’s inflation which beat expectations, rising to 2.9% up from 2.6% in July, reaching levels last seen in 2012.
Furthermore, in the Monetary Policy Committee meeting, the MPC also admitted the “slightly stronger than anticipated” UK economy could lead to a withdrawal of stimulus.
Bank of England governor Mark Carney said: “These developments had further strengthened the case for an immediate tightening in monetary policy.
“A withdrawal of part of the stimulus that the committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive.
“Some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target.”
Two MPC members continued to vote for a hike to 0.5%, Michael Saunders and Ian Macafferty, minutes revealed.
Rates have now been held at 0.25% since August 2016 when they were lowered from 0.5% due to market volatility following the UK’s vote to leave the European Union last June.
The committee voted also unanimously to keep quantitative easing at £435bn and corporate bond purchases at £10bn.
On the news, sterling jumped 0.63% to $1.329 and 0.62% to €1.118 in intraday trading while the FTSE 100 was down 0.38% to 7,352 points.
Markets are now pricing in 42% chance of a rate hike in November and a 54% chance in December, according to Bloomberg.
Nick Dixon, investment director at Aegon, said: “If employment and inflation inform interest rate forecasting, then both would suggest a rate rise is overdue. Unemployment is the lowest in 42 years and inflation exceeds its 2% target.
“The pressure is on to increase public sector wages to counter inflation, but with a slim majority the government will be wary about matching wage increases with a tax rise.
“Hence fiscal policy will loosen and monetary policy will tighten to maintain macro-balance.
“While there has not been a rate rise today, over the next 12-24 months rates will rise higher and faster than market expectations.”
Abi Oladimeji, CIO at Thomas Miller Investment, said: “The BoE’s decision to leave rates unchanged is consistent with the evidence on the performance of the UK economy.
“Unfortunately, the recent rise in inflation has occurred in the context of weakening UK economic fundamentals.
“The UK’s economic performance has lagged that of G7 peers in recent quarters and the outlook is clouded by uncertainties surrounding the outcome of the Brexit negotiations.
“Monetary tightening can often serve as a positive signal if it is a response to strong economic growth.
“However, rate hikes by the BoE at this point would be counterproductive as it could undermine economic activity at a time when both consumer and business confidence are already flagging.”
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