The Bank of England has kept interest rates at 5.25% as it forecast that inflation is set to fall to its target level a year and a half earlier than expected.

Policymakers on the Monetary Policy Committee (MPC) voted to hold rates at their near 16-year high for at least another month, but said how long rates should remain on hold would be kept “under review.”

Andrew Bailey, the Bank’s Governor, said there had been “good news” on inflation in recent months but that the committee needs to see more evidence that inflation will fall “all the way to the 2% target, and stay there” before it can lower interest rates.

Although the lack of a cut to rates might hit mortgage holders harder, new inflation forecasts from the Bank could bring some relief to households grappling with the cost-of-living crisis.

The rate of Consumer Prices Index (CPI) inflation is set to fall to 2% between April and June this year, about 18 months earlier than previous forecasts, according to the latest Monetary Policy Report.

However, it will only stay at the target level temporarily before increasing during the second half of the year, and could rise to 2.8% by the first three months of 2025.

Energy prices are expected to be a key driver of the level of inflation throughout the year.

About a third of the impact of higher interest rates is still set to work its way through the economy, due to monetary policy having a delayed effect on households and businesses, according to the Bank.

Just over half of UK homeowners with a fixed-rate mortgage have had to reprice their mortgage deal since rates began rising at the end of 2021.

This leaves about 2.3 million residential mortgage holders still set to see a jump in their repayments over 2024, with about 1.3 million facing an increase of more than £300 a month.

The Bank of England said it needs to keep monetary policy “restrictive for sufficiently long” to make sure inflation returns to target and remains there, adding it would “monitor closely” signs of persistent inflationary pressures and the overall strength of the economy.

Policymakers are keeping a close eye on economic measures including wage growth, the jobs market, and services inflation.

One member of the nine-person MPC, Swati Dhingra, voted to reduce interest rates to 5%, while two members, Catherine Mann and Jonathan Haskel, wanted to increase rates to 5.5%.

It marked the first time since the start of the Covid-19 pandemic that a member of the committee had voted for a rate cut.