The Bank of England kept its key policy rate unchanged as expected at its policy meeting Dec. 13, saying it expected a recent jump in inflation to be short-lived and that moderate increases in interest rates will be necessary in the coming years.
In a unanimous decision following its 25 basis-point rise in November, the BoE's monetary policy committee voted to maintain bank rate at 0.5%, it said Dec. 14. It also unanimously opted to maintain its stocks of corporate bond purchases at £10 billion and U.K. government bond purchases at £435 billion.
A rise in inflation to 3.1% in November — its highest level since March 2012 and well above the bank's 2% target — came after a depreciation in sterling following the Brexit referendum pushed up import prices, an increase that has just about run its course, the bank said.
"Reflecting the diminishing effect of sterling's depreciation, CPI inflation was forecast to decline from around 3% to approach the 2% target by the end of the three-year forecast period," it said.
If inflation rises more than 1 percentage point above the bank's target, Governor Mark Carney is obliged to write a public letter of explanation to the government.
While the rate of price increases is likely to ease, measures announced in the government's autumn budget will lessen the drag on aggregate demand stemming from fiscal consolidation, the bank said. But some activity indicators suggest the economy cooled slightly in the fourth quarter, it added.
"The committee remains of the view that, were the economy to follow the path expected in the November inflation report, further modest increases in bank rate would be warranted over the next few years, in order to return inflation sustainably to the target," the bank said.
The pound was little changed shortly after the decision at 12:30 p.m. London time, at $1.3426.