The Bank of England has kept interest rates unchanged at 3.75% following the recent jump in inflation.
Members of the Monetary Policy Committee voted by a narrow margin of five votes to four to keep rates unchanged, after reducing rates four times last year. Four members voted to reduce the rate by 0.25% to 3.5%.
It comes after inflation rose for the first time in five months in December to 3.4%.
However, Andrew Bailey, governor of the Bank of England, said he expects to see a sharp drop in inflation over coming months, with the Bank now expecting inflation to fall back around the 2% target from April. This would provide the Bank with scope to reduce the interest rate further.
“Overall, the risks from inflation persistence appear to have continued to reduce. I therefore see scope for some further easing of policy,” he said.
Commenting on the central bank’s decision, Kevin Brown, savings expert at Scottish Friendly, said: “By holding rates, the Bank of England clearly wasn’t prepared to risk another cut so soon. But this pause shouldn’t be mistaken for a change in direction. The labour market is cooling, wage growth is slowing and inflation is anticipated to fall this year as price pressures fade.
“If that plays out as expected, one or two further cuts later this year are still on the cards, with spring still the most likely window for the next move.”
Lindsay James, investment strategist at Quilter, said: “The Bank’s stance has shifted somewhat, clearly outlining that it expects rates to be cut further based on the current evidence.
“Markets had not been fully pricing in the first rate cut until June, but this has shifted to April following today’s report. For this to materialise, the MPC will want to see further evidence of falling inflation, which should be more apparent from the second quarter onwards as the impact of factors such as the freeze in rail fares and the removal of green levies from energy bills will start to be felt.
“Crucially, the Bank will also want to see evidence of cooling wage growth. Recent payrolls data has shown persistent weakness in the labour market, and this could bring pay settlements, and subsequently inflation, down faster than the Bank currently assumes.”
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