The Bank of England has held interest rates at 0.5%, but signalled borrowers should brace themselves for further and faster rate hikes after stronger-than-expected economic growth.
Policymakers on the nine-strong Monetary Policy Committee (MPC) voted unanimously to leave rates unchanged.
But minutes of the latest decision revealed rates would need to rise sooner and by more than expected at the time of the Bank’s last forecasts in November to get inflation back to the 2% target.
Bank of England (PA)
It leaves the door open to a potential rate hike as soon as May, with markets also now pencilling in more than three hikes within three years.
In the minutes, the Bank said: “Monetary Policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November report.”
The Bank added it wanted inflation to return to target within the “more conventional” time-frame of two years, rather than three.
But it reiterated that rate rises would be gradual and limited.
The pound surged after the report, up 0.8% against the US dollar to 1.399 and 1% higher against the euro at 1.143.
Financial markets believe there is a 50/50 chance of rates being raised to 0.75% in May, when the Bank’s next set of forecasts are due, with at least two more by the end of 2020, potentially taking the bank rate to 1.25%.
The Bank said the economy had performed better than expected and upped its growth forecasts to 1.8% in 2018, from 1.6% predicted at the time of its November report.
Average annual growth is set to ease back to 1.7% in 2019 – in line with its November forecast – and remain at 1.7% in 2020.
There was little cheer offered for financially squeezed households as its quarterly report showed rising oil prices would keep Consumer Prices Index (CPI) inflation above 3% in the short-term and see it take longer to return to target.
On the rosier economic outlook, the Bank said global growth has helped boost the UK – in particular overseas trade – with the world economy growing at its fastest pace for seven years.
The UK expanded by a surprisingly strong 0.5% at the end of 2017, up from 0.4% in the third quarter, although the Bank said it is expected to slip slightly back to 0.4% in the first quarter of 2018.
The Bank also cautioned that Brexit remained the biggest threat to growth, while households continue to be squeezed by poor wage growth and falling inflation.
It said Brexit talks remain the “most significant influence on, and source of uncertainty, about the economic outlook”.
There were also signs of strain in the housing market, where prices have softened, and in retail spending, according to the Bank.
Property prices have shown signs of being affected by the rate rise to 0.5% in November – the first in a decade – with mortgage costs rising since then.
Halifax figures this week revealed house prices fell 0.6% month on month in January after a 0.8% decrease in December.
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