The Bank of England has held its base rate at 0.25%, it announced at midday.

The rate stays the same after it was cut in August from 0.5%, which was the first change made in seven years.

The Bank's Monetary Policy Committee voted unanimously to:

• continue with the programme of sterling non-financial investment-grade corporate bond purchases totalling up to £10 billion, financed by the issuance of central bank reserves
• continue with the programme of £60 billion of UK government bond purchases to take the total stock of these purchases to £435 billion, financed by the issuance of central bank reserves.  

Read The Bank of England statement in full below.

Reaction:

Anna Stupnytska, Global Economist at Fidelity International, said: “As expected, the Bank of England left rates unchanged at today’s meeting. Despite market expectations of a hawkish shift, the BoE kept the neutral policy bias introduced in the last meeting, emphasising that policy can respond “in either direction”.

“The BoE is certainly in a tough spot as they seek to balance the ongoing cyclical strength of the UK economy while bearing in mind the potential for a Brexit-related slowdown in the months ahead. While the macro backdrop remains encouraging for now, investment intentions are already very depressed relative to growth and consumption is likely to be hit as inflation accelerates further.

“The central bank is clearly in the wait-and-see mode for now, but I believe monetary policy will need to become more accommodative as we move through the year, as it is forced to lean against the headwinds of Brexit-related uncertainties. In this respect, I still expect policy to become more accommodative, potentially via the re-introduction of QE later in the year.”

James Klempster, Head of Investment Management at Momentum UK, said: “The continued weakness of Sterling and simultaneous increase in the cost of key commodities such as crude oil continues to drive inflation. This has taken us a long way away from the dark days of perceived economic stagnation and the spectre of deflation that market participants were becoming anxious about a couple of years ago.

“In the short term, a base effect-driven increase in inflation does not prove elevated inflation is here to stay. But with employment relatively firm, if workers are able to embed these inflationary moves in their wage negotiations then we may see a persistently higher level than we’ve become accustomed to.

“Over the long-term we’d expect asset classes to provide returns in excess of inflation because they require that investors adopt some risk to own them - and that risk should be rewarded all else being equal.

“If inflation does remain elevated, then this will become reflected in asset pricing. The transition in pricing from this low inflation world to a higher one would be painful, especially for holders of fixed income securities where price is inversely related to yield.”

Shilen Shah, Bond Strategist at Investec Wealth & Investment, said: “The resilience of the UK consumer has led the BoE to further increase its GDP forecast 2016 to 2% from 1.4%. However, there are hints that the tolerance of a number of MPC members to higher inflation is close to their limit. The BoE’s also suggested that slack in the economy may be somewhat larger than previous thought, however inflation is still thought to peak at 2.8% in 2Q 2018. If the strength in the economy continues over the coming quarters, despite the uncertainty created by Brexit, the MPC patience may be further strained.”

Martin Palmer, Head of Corporate Funds Propositions, Zurich, said: “Rock-bottom interest rates and increased levels of quantitative easing has fuelled borrowing and consumer spending, powering economic growth. However, with a falling pound accelerating levels of inflation faster than expected, the Bank faces a challenge: keeping this in check against supporting growth and jobs."

Ben Brettell, Senior Economist, Hargreaves Lansdown, said: "The Bank of England faces a tough job in the coming months as it seeks to balance a surprisingly resilient economy, higher inflation and the difficult-to-quantify risks posed by Brexit.

"Unsurprisingly interest rates were left on hold, but the minutes noted that some MPC members were getting a little closer to the limits of their tolerance for higher inflation. This could mean we see the first interest rate rise in more than a decade at some point this year, particularly if wage growth turns out stronger than expected.

However I still feel this is improbable. The most likely scenario is that higher inflation and weaker pay growth will squeeze household budgets, meaning consumer spending is likely to slow in real terms. The Bank is unlikely to take the risk of raising borrowing costs in this environment. If it does happen, I would expect rates to remain at their previous low of 0.5% for some significant time afterwards."

Ian Kernohan, Economist at Royal London Asset Management, said: “Following the relatively robust GDP report for the fourth quarter of 2016, the Bank of England has raised its GDP growth forecast for this year by more than I expected, but made little change to their inflation projection.

“The MPC expect inflation to overshoot the 2% target, however this rise is coming from very low levels and is driven by some temporary factors. Wage growth, a key indicator of underlying inflation, remains modest.

“With higher inflation set to squeeze household incomes this year, and the likely shape of the UK’s trading arrangements post-Brexit still very unclear, we think the MPC will be reluctant to add to these pressures on the economy by raising interest rates in the near future.”

Calum Bennie, Scottish Friendly’s savings specialist, said: “Robust economic growth isn't helping families whose incomes will be stretched with rising inflation. Meantime, keeping interest rates at this all time low is over cooking the vegetables. The emergency of Brexit that led to the reduction to 0.25 per cent last August has passed. Low interest rates simply fuel consumer debt and what's needed is more help to get people saving again so families will have funds to help them weather the economic vicissitudes ahead.”

Shaan Malhi, CEO and Founder of online mortgage broker Trussle, said: “The Bank of England appears to be adopting a ‘wait and see’ approach to interest rates, refraining from any hike until it’s certain consumers and businesses can handle one. This is great news for hopeful first-time buyers, who are being given more time to take advantage of extremely low mortgage rates as they climb onto the property ladder."

The Bank of England statement in full:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 February 2017, the Committee voted unanimously to maintain Bank Rate at 0.25%.

The Committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, totalling up to £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

As the MPC had observed at the time of the UK’s referendum on membership of the EU, the appropriate path for monetary policy depends on the evolution of demand, potential supply, the exchange rate, and therefore inflation. The Committee’s latest economic projections are contained in the February Inflation Report. The MPC has increased its central expectation for growth in 2017 to 2.0% and expects growth of 1.6% in 2018 and 1.7% in 2019.

The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the Chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households. Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum.

Nevertheless, continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming few years. As a consequence, real consumer spending is likely to slow.

In preparing the February Report, the MPC undertook its scheduled regular assessment of aggregate supply-side conditions. Pay growth, although edging up, has remained persistently subdued by historical standards – strikingly so in light of the decline in the rate of unemployment to below 5%. This is likely to have reflected somewhat stronger labour supply than previously assumed and, therefore, the presence of a greater margin of slack in the labour market, restraining wage increases. This updated assessment means that the stronger path for demand in the February projection is roughly matched by higher supply capacity. Combined with the 3% appreciation of sterling and a somewhat higher yield curve over the past three months, that results in a projected path of inflation that is similar to the one expected in November, despite the stronger growth outlook.

The value of sterling remains 18% below its peak in November 2015, reflecting investors’ perceptions that a lower real exchange rate will be required following the UK’s withdrawal from the EU. Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target.

This effect is already becoming evident in the data. CPI inflation rose to 1.6% in December and further substantial increases are very likely over the coming months. In the central projection, conditioned on market yields that are somewhat higher than in November, inflation is expected to increase to 2.8% in the first half of 2018, before falling back gradually to 2.4% in three years’ time. Inflation is judged likely to return to close to the target over the subsequent year. Measures of inflation compensation derived from financial markets have stabilised at around average historical levels, having increased during late 2016 as concerns about a period of unusually low inflation faded.

Monetary policy cannot prevent either the real adjustment that is necessary as the UK moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany it over the next few years. Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth. For this reason, the MPC’s remit specifies that in such exceptional circumstances the Committee must balance the trade-off between the speed with which it intends to return inflation to the target and the support that monetary policy provides to jobs and activity. At its February meeting, the MPC continued to judge that it remained appropriate to seek to return inflation to the target over a somewhat longer period than usual, and that the current stance of monetary policy remained appropriate to balance the demands of the Committee’s remit.

As the Committee has previously noted, however, there are limits to the extent that above-target inflation can be tolerated. The continuing suitability of the current policy stance depends on the trade-off between above-target inflation and slack in the economy. The projections described in the Inflation Report depend in good part on three main judgements: that the lower level of sterling continues to boost consumer prices broadly as expected, and without adverse consequences for expectations of inflation further ahead; that regular pay growth does indeed remain modest, consistent with the Committee’s updated assessment of the remaining degree of slack in the labour market; and that the hitherto resilient rates of household spending growth slow as real income gains weaken.

In judging the appropriate policy stance, the Committee will be monitoring closely the incoming evidence regarding these and other factors. For instance, if spending growth slows more abruptly than expected, there is scope for monetary policy to be loosened. If, on the other hand, pay growth picks up by more than anticipated, monetary policy may need to be tightened to a greater degree than the gently rising path implied by market yields. Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.