The Monetary Policy Committee said the 2 per cent appreciation in sterling over the previous month reflected a stronger economic outlook, but that greater strength could jeopardise exports.
“Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery,” the MPC said in minutes of its December 4-5 meeting.
Sterling is near a five-year high against other currencies, and the central bank said that for Britain’s “burgeoning” economic recovery to be sustainable, it needs to rely more on business investment and exports and less on consumer demand.
The nine-member MPC was unanimous in voting to keep interest rates on hold at 0.5 per cent and to leave the Bank’s £375bn stock of bond purchases untouched.
The policymakers said stronger sterling, and Government steps at the start of December to limit household energy bill rises, had improved the inflation outlook.
Inflation could hit its 2 per cent target for the first time in over four years early in 2014, the minutes said, as smaller rises in utility bills could reduce inflation by 0.15 percentage points compared to previous forecasts.
Consumer price inflation was 2.2 per cent when the MPC met, and has since fallen to 2.1 per cent.
The MPC said the outlook for inflation, inflation expectations and financial stability gave no grounds for it to move away from the so-called forward guidance that it gave in August, when it committed to keep interest rates on hold until unemployment falls to 7 per cent.
The Bank forecast at the time that it would take at least three years for unemployment to fall to this level from 7.8 per cent at the time of the forecast.
But unemployment has fallen faster than the Bank of England predicted, and was 7.6 per cent in the three months to September, while inflation dropped to a four-year low of 2.1 per cent last month.
Last month the Bank revised its forecast to show unemployment at 7 per cent as soon as this time next year, if interest rates stay unchanged.
Another scenario, based on market bets on interest rate rises, points to 7 per cent unemployment in late 2015.
Britain’s economy has strengthened since August, with 0.8 per cent growth in the third quarter, and the Bank predicts expansion of 2.8 per cent next year, above the long-run average.
But output is still 2.5 per cent below its pre-crisis peak, and Governor Mark Carney, in a question-and-answer session with lawmakers, stressed that a sustained recovery was at risk due to weakness in the eurozone.
Spencer Dale, chief economist at the Bank, has also highlighted the barriers to business investment that come from the poor relations between some small businesses and banks since the financial crisis.
Policymakers said in the minutes that they remained puzzled that the improvement in growth had not brought a cyclical upturn in workers’ productivity, which has been very weak in Britain since the financial crisis.
The Bank said data published so far may be “misleading” and that it was too early to judge whether the economy’s supply capacity was failing to keep up with the increase in demand.
But if productivity does not pick up, it could potentially push up inflation, and force the Bank to raise interest rates sooner than it would like.
Markets currently expect a first rate rise in mid-2015, according to the Bank.
The regional network of agents, represented in Yorkshire by Juliette Healey, said business investment intentions pointed to modest growth in capital spending over the next year, but many firms remained cautious about prospects.