The British economy continues to enjoy surprising robust growth, but the danger of fast-rising inflation hitting the spending power of consumers hangs over it, according to officials at the Bank of England (BOE) on Thursday as they announced that the bank rate would stay at 0.25 percent.
British GDP growth has been resilient since the June 23 Brexit referendum vote set the country on a path to leave the European Union (EU).
Many economists and the BOE itself predicted that there would be a significant decline in the rate of GDP growth in the wake of the vote, as businesses halted investment, sterling fell, and consumers pulled in their spending.
However, growth has been sustained throughout the second half of 2016, largely due to continued consumer spending, and remains so into 2017.
The BOE believed this robustness in growth has continued.
"Bank staff's GDP nowcast was for growth of 0.6 percent in Q1. Although it is too early to make a confident prediction of growth in Q2, there has been relatively little evidence so far from the output indicators of a slowdown," according to the BOE Monetary Policy Committee (MPC) minutes for March released at midday.
Official data and major business surveys had continued to indicate a steady pace of expansion in real activity, the BOE noted.
However, the BOE believed that rising inflation driven by the large fall in the sterling exchange rate after the Brexit vote, from 1.48 U.S. dollars to 1.22 U.S. dollars, would dampen consumer spending.
A slowing household demand had been a central feature of the MPC's February forecast. Household consumption was estimated to have grown by around 3 percent in 2016, the highest rate since 2004, but that was projected to fall to around 2 percent in 2017.
The March report noted that there were several indicators that were consistent with such a slowdown in spending including retail sales which were estimated to have fallen for three months in succession, with the largest falls seen in food, drink and fuel, which were also the items which had felt the strongest impact of inflation.
The BOE forecast that CPI inflation, at 1.8 percent in the latest figures for February, would rise above the BOE's target of 2 percent over the next few months, "before peaking at around 2.75 percent in early 2018 and drifting gradually back down towards the target thereafter".
The BOE said that the inflation overshoot "entirely reflects the expected effects of the drop in sterling".
Pay growth had remained "subdued", and this was consistent with the committee's view that some slack remained in the labor market, the report noted.
"There had been some signs that the squeeze in household's real income growth was feeding through into spending," the minutes said.
The MPC voted 8-1 for no change in the bank rate, the first time since January 2016 that a member had backed a rise, and the first time the committee has not been unanimous in its decision since July last year when it was split over whether to drop the rate as a response to the Brexit referendum vote.