The pound jumped against the dollar as policymakers at the Bank of England voted to hold interest rates at 0.25 per cent again today - and hinted an interest rate hike could happen "in the coming months".
Minutes of the latest meeting of the Bank of England's monetary policy committee showed members believe UK inflation will overshoot three per cent by October.
Although seven members voted to hold rates, while two voted to hike, they suggested an easing of monetary policy could begin soon.
A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.
The hawkish comments pushed the pound up 0.6 per cent against the dollar to $1.3293, and 0.6 per cent against the euro, to €1.1177.
"The majority of members feel a withdrawal of stimulus will be appropriate in the coming months, as slack in the economy is being absorbed more rapidly than expecte," said Ben Brettell, senior economist at Hargreaves Lansdown.
"To me, leaving rates where they are makes a great deal of sense. Usually a combination of low unemployment and above-target inflation would mean a rate rise was firmly on the cards. But these are far from normal times. Unemployment might be at a multi-decade low, but this has yet to feed through into any meaningful wage growth. Meanwhile, inflation is expected to fall back without the need for action, as the effect of sterling weakness falls out of the year-on-year calculation."
Wage growth disappoints
The pound continued to hover around $1.32 against the dollar ahead of the vote. Having sailed past $1.33 on hopes of positive inflation figures yesterday, sterling sank after official data showed wages rose more slowly than expected in the three months to August.
Analysts pointed out yesterday's weak data, which showed earnings rose just 2.1 per cent, way below inflation of 2.9 per cent, was likely to "put the kibosh" on any interest rate hike this month.