Further cut in interest rates off agenda amid Bank of England concern over inflation

Campaigners hold up helium balloons outside the Bank of England in London, calling on the bank to re

Campaigners hold up helium balloons outside the Bank of England in London, calling on the bank to replace its quantitative easing programme with "QE for People", highlighting the fact that foreign-owned corporations are benefiting from the nank's purchases of corporate bonds. Photo: Nick Ansell/PA Wire - Credit: PA

The Bank of England has kept interest rates on hold and raised its economic outlook for this year and next, but warned that tough times still lie ahead with lagging growth and a jump in inflation set for 2018.

Minutes for the latest Monetary Policy Committee (MPC) meeting showed members voted unanimously to keep rates at 0.25%, having slashed them from 0.5% to a fresh record low in August as part of a post-referendum stimulus package worth £170bn.

And in its latest quarterly inflation report, the bank raised its forecast for Gross Domestic Product (GDP) growth over the next two years, from 2.0% to 2.2% for 2016 and from 0.8% to 1.4% in 2017.

This follows better-than-expected growth of 0.5% in the third quarter, with the bank also now pencilling in fairly steady expansion of 0.4% in the final three months of 2016.

But the bank slashed its forecast for growth in 2018 to 1.5% from 1.8% and gave a gloomy outlook for households, with higher unemployment and soaring inflation set to squeeze their spending power.

In the face of fears over the impact of inflation caused by the collapse in the pound since the Brexit vote, the bank insisted the surge would be temporary. It said raising rates to offset the higher inflation, which is predicts will hit 2.7% next year, would be “excessively costly” to the economy.

The bank’s relatively upbeat short-term outlook has dashed prospects for another interest rate cut this year, which policymakers said in September was still on the cards.

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“In light of the developments of the past three months, all MPC members agreed that the guidance it had issued following its August meeting regarding the likelihood of a further rate cut in bank rate had expired,” the latest minutes said.

Financial markets are now predicting the bank will hold interest rates steady through to the end of 2019, when they expect the MPC to vote for an increase.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The minutes of the MPC’s meeting show that the committee has become much more concerned about inflation and will not necessarily step in to stimulate the economy again if growth slows.”