The Bank of England on Thursday kept its key interest rate at a record-low 0.1 percent, but signalled a probable hike in the coming months to dampen soaring UK inflation.

Following a regular meeting, the BoE added in a statement that it was maintaining its vast stimulus programme supporting the pandemic-hit UK economy with cash totalling almost £1.0 trillion ($1.4 trillion, 1.2 trillion euros).

The BoE trimmed its UK economic growth forecasts for this year and next, adding that high inflation would be temporary.

The bank “will always focus on the medium term prospects for inflation rather than factors that are likely to be transient”, governor Andrew Bailey later told a press conference.

Market expectations had been for an increase in borrowing costs this month to tackle runaway prices that are plaguing economies worldwide.

The pound slumped 1.0 percent against the dollar after the BoE sat tight.

“The Bank of England chose to err on the side of caution and defy market expectations,” said Yael Selfin, chief economist at KPMG UK.?

“The bank is facing a delicate trade-off between rising inflation and a bumpy recovery, with supply chain difficulties… adding pressure on businesses as they emerge from the pandemic.”

The bank said the UK economy would grow 7.0 percent this year, down from its previous forecast of 7.25 percent.

Output would slow to 5.0 percent next year, down from a prediction of 6.0 percent, it added.

Hike still on cards

However, the BoE said it would “likely be necessary” to have “some modest tightening of monetary policy” to bring down inflation.

Policymakers “judged that… it would be necessary over coming months to increase” the main rate to bring UK annual inflation back down to the central bank’s target of 2.0 percent.

British consumer price inflation — which currently stands at 3.1 percent — was “now expected to peak at around 5.0 percent in April”, the statement said.

Inflation worldwide is being pushed up by surging energy costs and supply shortages as Covid-hit economies reopen.

“To cool down the economy in the face of these shocks would be the wrong thing to do,” Bailey added.

Some analysts meanwhile pointed to a lack of credibility for the BoE and Bailey after markets interpreted recent comments by policymakers as indicating that it would tighten rates Thursday.

“It’s really one of those moments where you have to question the communication strategy of the BoE,” said Neil Wilson, analyst at Markets.com.

Policymakers voted 7-2 in favour of keeping the rate on hold, and 6-3 to maintain the stimulus amount.

Fed taper

The BoE decision comes one day after the US Federal Reserve said it would start reducing the pace of its stimulus bond purchases later this month as the US economy makes a solid recovery from the pandemic.

But the Fed maintained its view that inflation is transitory and Chairman Jerome Powell said the US central bank “can be patient” about raising interest rates.

The European Central Bank and Bank of Japan are holding fire for now on rates and stimulus, but central banks in countries such as Brazil, Singapore, South Korea and New Zealand have all increased borrowing costs recently.

The Bank of Canada has ended its significant bond-buying stimulus programme, and has flagged an interest rate hike earlier in 2022 than previously envisaged.

European Central Bank President Christine Lagarde on Wednesday said that despite a current surge in prices, the outlook for eurozone “inflation over the medium term remains subdued”.

She said that the ECB was “very unlikely” to raise its interest rates even next year.

As the pandemic erupted in March 2020, the BoE slashed its key interest rate from 0.75 percent and also began pumping massive sums of new cash into the economy.

The central bank’s total emergency stimulus package stands at £895 billion in the wake also of the global financial crisis and Brexit.

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