The Bank of England increased interest rates by 25 basis points to 4.5% and warned further tightening may be required as it signalled inflation is set to fall slower than previously forecast.
The widely expected move is the 12th consecutive rise by the UK central bank and leaves interest rates at their highest level since 2008 as the battle to tame double digit inflation continues.
The Monetary Policy Committee voted 7-2 in favour of the latest increase with two members, Silvana Tenreyro and Swati Dhingra, preferring to maintain Bank Rate at 4.25%.
“The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation,” the minutes of the latest MPC meeting showed.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”
The Bank of England expects CPI inflation to fall back more slowly than it forecast in February.
“CPI inflation is expected to fall sharply from April, in part as large rises in the price level one year ago drop out of the annual comparison,” it said.
“However, food price inflation is likely to fall back more slowly than previously expected.”
CPI inflation is expected to decline to a little above 1% at the two and three-year horizons, materially below the 2% target.
“However, there remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2% target,” the Bank added.
But there was better news on economic growth.
The Bank said it now expects GDP to be 2.25 percentage points higher at the end of its three-year forecast period than it said in February.
The BoE expects UK GDP to be flat over the first half of this year, although underlying output, excluding the estimated impact of strikes and an extra bank holiday, is projected to grow modestly.
The improved outlook reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labour market leads to lower precautionary saving by households.
Although there are indications that the labour market has started to loosen, it is expected to remain tighter than in the February Report in the near term.