The Bank of England has signalled it could continue to increase interest rates over the coming months, as it raised its base rate to a fresh 14-year high.
Decision-makers said on Thursday that they are increasing interest rates from 3% to 3.5%, despite inflation easing last month.
It is a slowdown from the last rise in November when rates were increased by 0.75 percentage points, and in line with what economists had forecast.
Rates have been raised in every meeting since late last year as the Bank tries to get inflation under control.
The Monetary Policy Committee (MPC), which sets interest rates, said a “forceful” policy response was justified as the labour market remained tight across the month.
There are also signs that inflationary pressures could stick around for longer than thought, it said.
Most of the MPC’s nine members agreed that they would continue to vote for rate rises if the economy broadly continues to develop as the committee expected when it last met a month ago.
“The majority of the committee judged that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in bank rate might be required for a sustainable return of inflation to target,” the bank said.
On Wednesday, the Office for National Statistics (ONS) revealed that inflation had reached 10.7% – slightly lower than expectations and a reduction from the 41-year high seen in October.
The MPC is tasked with trying to get inflation under control, to 2% if possible.
The central bank also said that the economy is now expected to do better in the final three months of 2022 than it had previously thought. Gross domestic product (GDP) is forecast to fall by 0.1% in the fourth quarter, compared with the previous forecast of a 0.3% drop.
But two members of MPC voted for interest rates to remain unchanged at 3% – going against the majority.
“The real economy remained weak, as a result of falling real incomes and tighter financial controls,” they argued. “There were increasing signs that the downturn was starting to affect the labour market; but the lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through.”
Therefore, the two - Swati Dhingra and Silvana Tenreyro - said rates as they stand now should be “more than sufficient to bring inflation back to target”.
Another member, Catherine Mann, argued at the meeting for a 0.75 percentage point rise, to 3.75%.
She said that, while inflation is easing, she saw evidence that rising prices and wages will keep putting pressure on inflation.
Chancellor Jeremy Hunt said: ”High inflation, exacerbated by Putin's war in Ukraine, continues to plague countries across the world, eating into people's pay cheques and driving up food and energy prices.
”I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target.
”Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery.”
Chris Arcari, head of capital markets at Hymans Robertson, commented: “Since the last Monetary Policy Committee Meeting in early November, pressure on the Bank of England to maintain market confidence has abated somewhat and, while further rate rises are priced, the extent of further rises expected has fallen dramatically compared to those seen in the wake of the now infamous mini budget.
“The market is pricing with near-certainty a 0.5% p.a. rate increase on Thursday, a step down from the recent 0.75% p.a. increase, with rates expected to peak around 4.7% p.a. next summer.
”Despite recent growth out-turns surprising to the upside, tentative signs of weakening labour demand and likely near-term economic weakness probably provides major central banks just enough justification to ease the pace of rate increases.
“However, wage growth remains strong, with average weekly earnings rising 6.1% year-on-year in October, and the Bank of England are likely to err on the side of caution with stickier core inflation likely making the MPC less likely to start cutting rates towards the end of next year than the market expects, even if economic output is faltering,” he added.
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