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Bank of England stands pat on rates, but hike expected in coming months

The Bank of England's monetary policy committee voted unanimously to keep interest rates at 0.5% but raised the prospect of a rate hike in the coming months.

The MPC, which sets monetary policy to meet a 2% inflation target, voted at its meeting Wednesday to keep interest rates unchanged. It also voted to keep its asset purchase program unchanged.

A document outlining the MPC meeting noted that the consumer price index fell to 3% in December from 3.1% in November, and is expected to remain around 3% in the short term, reflecting higher oil prices. The bank also said that, more generally, "sustained above-target inflation remains almost entirely due to the effects of higher import prices following sterling's past depreciation." Inflation is, however, expected to fall back gradually, albeit remaining above the 2% target.

The MPC said should the economy evolve broadly in line with its projections in its February inflation report, published Thursday, "monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report, in order to return inflation sustainably to the target."

The bank increased interest rates in November by 25 basis points.

"The Bank of England stood pat at today's meeting, but laid the groundwork for a rate hike in the very near future," said Silvia Dall'Angelo, senior economist at Hermes Investment Management, in a response comment. She added: "It now looks like the bank is eyeing May for the next move, provided general conditions allow for it. In light of recent developments in the economy, Brexit negotiations and financial markets, that is far from a slam dunk."

Ian Kernohan, economist at Royal London Asset Management, agreed that a May hike was likely. "Assuming there is no major economic shock, the MPC has judged that monetary policy needs to be tightened somewhat earlier, and somewhat more, than anticipated in November," he said in a separate response comment.