The Bank of England has warned that inflation will, in the short-term, be more "pronounced" than expected but still expects it to be transitory.
The central bank’s monetary policy committee announced today (August 5) that it had voted unanimously to maintain the base rate of interest at 0.1 per cent.
But expectations of a more hawkish tone were again not met, with the BoE projecting that the current rising levels of inflation are still expected to be fleeting.
Inflation has been above the Bank's 2 per cent target since May, most recently hitting 2.4 per cent in June.
The Bank said although the figure is now expected to rise to nearly 4 per cent in the last quarter of this year, largely due to “developments in energy and other goods prices”, it would fall back close to the 2 per cent target.
The committee did concede rising inflation was now expected to be more pronounced than previously expected, however it added it did not intend to tighten monetary policy “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.
The Bank is predicting there will be some "modest tightening" of monetary policy over the next two years if the economy behaves as it has forecast.
At the end of June the pound plunged as the BoE issued a similar statement, saying the current rising inflationary environment was transitory.
Expectations of a more hawkish tone on rate rises was expected after the US Federal Reserve brought forward its timeframes on raising rates, hinting it could raise rates twice in 2023, a year earlier than planned.
The MPC voted 7-1 for the maintenance of UK government bond purchases as well as maintaining corporate bond purchases at £20bn.
Ed Monk, associate director, personal investing at Fidelity International said: “The mood music at the BoE appears to be changing, albeit slowly.
“The bank may soon have to balance the need to control inflation with the potential for instability created by imposing higher borrowing costs. Younger generations in particular have never experienced high inflation and rising rates, and will be unused to feeling the effects of a rise in the mortgage payments.”
David Miller, investment director at Quilter Cheviot said the BoE likes to talk the talk “ but it doesn’t much like to act”
“Despite recent murmurings from a few MPC members on the need to tighten monetary policy, the hawks remain in the minority. There is no rush to change policy as the economic outlook remains fraught with uncertainties. Not least the uncertainty around what will happen when we go into winter with no restrictions, and no income support measures from the government."
He added that a wider constraint on the Bank of England’s policy conditions is that it will probably wait for other central banks to raise rates before it makes the change in policy.