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Bank of England holds interest rate, but sounds hawkish note

The Bank of England's Monetary Policy Committee voted unanimously to hold its key interest rate at 0.5%, but a more hawkish tone in its statement suggested that further rate rises could be on the way in the near future.

Monetary policy may need to be tightened "somewhat earlier and by a somewhat greater extent" than the MPC anticipated at its previous meeting in November 2017 as inflation continues to run above target, according to the minutes of its meeting Feb. 7.

Inflation stood at 3% in December, a fall from the 3.1% recorded in November, but still well above the BoE's 2% target.

Higher import prices following the depreciation of sterling following the Brexit referendum in 2016 have been the main force behind the recent run of above-target inflation, BoE Governor Mark Carney wrote in a Feb. 8 letter to the government. This, combined with a recent increase in oil prices mean that it will remain at around 3% "in the short term".

The governor of the Bank of England is obliged to write a letter of explanation to the government if inflation is 3% or higher.

The MPC is currently facing the challenge of balancing the need to support growth in jobs and activity with a responsibility to keep inflation in check. But a recent pick-up in demand in the U.K. economy and a reduction in slack, means that it may not be "appropriate" for the MPC to keep accommodating above-target inflation for much longer, according to the minutes.

The MPC "stands ready to respond to developments as they unfold to ensure a sustainable return of inflation to the 2% target," it said, adding: "Any future increases to the Bank Rate are expected to be at a gradual pace and to a limited extent."

The committee said it expects the current squeeze on living standards in the U.K. to start to ease, and for inflation to eventually come back toward the 2% target.

The MPC voted in November to raise its benchmark interest rate from 0.25% to 0.5%, the first increase since the global financial crisis.

It is still too early to gauge what the impact of the November rate rise has been on the U.K. retail banking market, according to the Bank of England's inflation report, also published Feb. 8. However, retail interest rates have risen "slightly" in recent months and are expected to rise further as the increase in the bank rate is passed through.

Around 40% of residential mortgages in the U.K. are on a floating rate; increases in the Bank Rate will have been passed through to them with immediate effect, the report noted.