The Bank’s Monetary Policy Committee also held firm on its policy for quantitative easing - aka money printing - with members voting 7-to-1 in favour of sticking to its current schedule of buying £895 billion of government bonds.
Michael Saunders, who has moved from being an arch-dove to the panel’s lead hawk in recent weeks, was the only dissenting voice.
The Bank said: “The committee’s central expectation is that current elevated global and domestic cost pressures will prove transitory.
“Nonetheless, the economy is projected to experience a more pronounced period of above-target inflation in the near term than expected in the May Report.”
The central bank’s ‘wait and see’ approach gives the panel time to see how the economy reacts to any fresh shocks from the delta variant and the end of the furlough scheme in September before withdrawing stimulus.
It nevertheless sounded alarm bells on inflation, forecasting a rise from 2.5% to 4% - which is two times the Bank’s target figure and would be the highest level since 2012.
The minutes noted “some modest tightening of monetary policy is likely to be necessary” in the next two years to keep a lid on further increases.
The Bank kept its growth forecast at 7.25% for 2021, as it said gross domestic product (GDP) was set to have risen by a better-than-expected 5% in the second quarter, but will slow to around 3% – weaker than first forecast – in the third quarter.
Its latest set of quarterly forecasts shows it expects the economy to then grow by 6% in 2022 and by 1.5% in 2023, compared to previous forecasts of 5.75% and 1.25% respectively.
The change in tone over inflation saw a host of experts suggest that interest rate rises could come sooner rather than later as the bank seeks to balance taming inflation with keeping the recovery on track.
Ed Monk, associate director at Fidelity International, said: “The mood music at the Bank of England appears to be changing, albeit slowly, with inflation now expected to rise to 4% this year compared to a previous forecast of just 3%.
“This is yet to translate into any change in monetary policy and rate-setters voted 7-1 to keep rates and asset purchases at their current levels, but the minutes from the August meeting reveal that some members now believe the conditions for some tightening have been met.
“The labour market remains key with recent wage rise and unemployment data turning out stronger than expected. That points to a broad-based rise in demand that may not recede as the economy recovers from the pandemic.
“While the Bank rate is still likely to remain at its current 0.1% this year, expectations of a future rise have come in somewhat and markets may have to process a quicker return to more normal monetary policy.
“The Bank may soon have to balance the need to control inflation with the potential for instability created by imposing higher borrowing costs. Younger generations in particular have never experienced high inflation and rising rates, and will be unused to feeling the effects of a rise in the mortgage payments.”
Yaelâ¯Selfin, chief economist at KPMG UK, added: “A raft of uncertainties the causes and outlook for inflation, as well as the impact of the impending withdrawal of government support schemes, saw the Bank of England keeping its policy stance unchanged, while amending its short term outlook for inflation considerably.
“The uncertainty about the evolution of the pandemic, as well as the current fragility of supply chains, together with the high level of mismatch in the labour market, could see inflation diverging more significantly from the Bank’s forecasts in the short term, resulting in markets experiencing a less smooth ride.”
Jeremy Batstone-Carr, European strategist at Raymond James, said: “The economy is cautiously reopening but the Bank of England’s Monetary Policy Committee has yet to see enough economic activity to justify adjusting its current policy.
"Yes, we have witnessed a heroic rebound from the economic crash last year, but the recovery has not been evenly distributed; industrial, construction, and service sector output all remain well below February 2020's pre-pandemic levels, and these are all dragging down that all important headline GDP figure.
“Unemployment figures are also a cause for concern. The Office for National Statistics tells us that 1.9m Britons remain on the Job Retention Scheme.
“If these workers are counted as unemployed, as in an economic sense they are, the UK's unemployment rate would have been 10.4% in June, down from the 32% peak in May 2020 but a long way from the 3.1% rate prevailing in February 2020.
“A central banker's nightmare scenario is an economic rebound that falters before full employment has been restored as this would lead to an uncontrolled spiral into an economic depression.
"It’s for that reason that central bankers all over the developed world are promising easy monetary conditions and negative real interest rates as far forward as the eye can see.
"Until they are happy there are no more flies in the ointment, or the inflationary threat is realised, this stance is unlikely to change.”
Simon Lister, an IFA at financial comparison website InvestingReviews.co.uk, said: “Despite runaway inflation, there was no way the Bank of England was going to raise rates given the challenges facing the economy, especially with the furlough scheme due to end next month.
"Rishi Sunak may be confident that the economy will hold up when the furlough scheme draws to a close but Threadneedle Street is less so.”