A 'surprisingly hawkish' stance from the Bank of England (BoE) has seen it come the closest since 2007 to hiking interest rates.
The central bank's monetary policy committee (MPC) opted to keep rates at their historic low of 0.25 per cent in its June meeting, but support for a tightening of policy was higher than anticipated. The MPC voted by five votes to three to maintain rates, in contrast to an expected tally of seven against one.
The Bank staff’s summary core inflation indicator, based on a number of different measurement approaches, had increased to 2.4 per cent, it said.
"Inflation could rise above 3 per cent by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services," said the bank in its meeting notes.
However the BoE also highlighted other factors, including stagnant growth for both wages and the broader economy, as well as uncertainty stemming from Brexit negotiations, which could help form a case for a continuation of loose monetary policy.
"Monetary policy cannot prevent either the necessary real adjustment as the UK moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years," it said.
"Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth."
The decision comes following a period of rising prices. The CPI measure of inflation came in at 2.9 per cent for May, exceeding the BoE's recent projections. Inflation excluding food, alcohol, tobacco and energy rose to 2.6 per cent, again outstripping projections.
Paul Hollingsworth, of Capital Economics, said the more hawkish tone from the latest notes suggested "some concern" about rising prices, as well as the strength of UK employment.
He said the impending end of MPC hawk Kristin Forbes' tenure, and broader uncertainty, made an imminent rate hike unlikely, but added the BoE could still hike sooner than markets expect.
"With the economy having weathered political uncertainty relatively well in the recent past, and signs emerging that the government may be about to ease back on austerity, the decision and minutes support our view that the first hike in interest rates will come much sooner than the April 2020 date implied by markets ahead of the meeting," he said.
