The Bank of England has said Brexit-fuelled inflation is “close to its peak” as it kept interest rates on hold after the first hike for a decade last month.
But minutes of the latest decision showed policymakers are expecting an end-of-year dip in economic growth, with signs pointing to fourth quarter expansion being “somewhat below” the 0.4% seen in the third quarter.
The Bank’s nine-strong Monetary Policy Committee (MPC) voted unanimously to leave rates unchanged after November’s milestone rise from 0.25% to 0.5%.
The Bank of England, headed by Governor Mark Carney, is expecting inflation to ease back and wages to rise in 2018 (PA)
Policymakers said there were further signs of respite on the way for income squeezed households as it confirmed inflation would soon start to ease back after hitting a near-six year high of 3.1% in November.
The Bank said: “The MPC continued to judge that inflation was likely to be close to its peak and would decline towards the 2% target in the medium term.”
Official data on Tuesday revealed the higher-than-expected inflation figures, which means Bank governor Mark Carney must pen a letter to Chancellor Philip Hammond – due to be published in February – outlining the reason behind the rapid rise.
The Bank said it also still believes pay growth – which has lagged behind inflation for seven months in a row – would start to rise next year, but stressed “uncertainties” around this remained.
On economic growth, minutes of the meeting showed that recent figures from the various sectors of the economy pointed to fourth quarter expansion being “slightly softer” than in the previous three months.
But it said growth was set to be “a little above” the 0.2% forecast in its November inflation report.
The Bank said it expects there to be a modest boost to economic growth from last month’s Budget move to slow the pace of austerity cuts, by around 0.3% over the next three years.
Although it said the Budget changes will also add an extra 0.1% to inflation over that period.
It also said the recent progress made in the Government’s Brexit negotiations, which allowed talks to move on to the issue of trade, would “reduce the likelihood of a disorderly exit and was likely to support household and corporate confidence”.
Sterling was nearly flat after the interest rate decision was announced, trading slightly higher against the US dollar at 1.342 and at 1.134 versus the euro.
The decision comes after the Bank of England voted 7-2 to increase rates in November – the first rise since July 2007 – as it sought to cool surging inflation.
It signalled last month that two more rate hikes were likely over the next three years to return inflation back to its 2% target, which could see rates hit 1% by the end of 2020.
In minutes of its latest decision, the MPC stressed that “further modest increases in Bank Rate would be warranted over the next few years”.
But it stressed once more that these would be “gradual” and “limited”.
This month’s MPC meeting comes amid mixed reports from the economy, with activity in Britain’s manufacturing sector jumping to its highest level in more than four years while service sector growth has eased back.
This may come as a welcome rebalancing of the economy, but shows a worrying fall-out from Brexit-fuelled inflation on the UK’s biggest contributor to gross domestic product.
Services firms increased prices last month at the fastest pace for nearly a decade in the face of soaring costs, which slowed the pace of new orders.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said faltering growth suggested any further rate hikes were some way off.
She added: “It’s clear that now is not the time for a further rate rise.
“Even last month’s decision may have been too hasty given the strain the economy is under, and we certainly don’t expect further moves from the MPC in the short term.”