Bank of England says it expects inflation has peaked as it holds interest rate

The Bank of England has voted to leave interest rates on hold at 4%, but a knife-edge split on its Monetary Policy Committee suggests a cut may be coming very soon.

The nine members of the Bank's MPC voted 5-4 in favour of leaving borrowing costs unchanged, in the face of higher-than-usual inflation in recent months. Money blog: Good news for mortgage holders could be on wayThe Bank's chief mandate is to keep inflation - the rate at which prices have changed over the past year - as close as possible to 2% and, all else equal, higher interest rates tend to bring down prices.However, consumer price index inflation was at 3.8% in September, higher than anywhere else in the G7 group of industrialised nations.

However, unveiling a new set of economic forecasts today, the Bank said it expects inflation has now peaked, and will drop in the coming months, settling a little bit above 2% in two years' time. The Bank's decision comes only three weeks ahead of the budget, which will lead some to suspect that it held off a rate cut so it could reassess the state of the economy post-budget.

The chancellor has signalled that she is likely to raise taxes and trim back her spending plans - something that could further dampen economic growth. The governor, Andrew Bailey, said: "We held interest rates at 4% today.

We still think rates are on a gradual path downwards but we need to be sure that inflation is on track to return to our 2% target before we cut them again." The Bank said that, so far at least, tariffs had contributed to slightly lower than expected inflation. It said it expected gross domestic product growth of 1.2% next year and 1.6% the year after.

This is all predicated on the presumption that the Bank brings its interest rates down from 4% to 3.5% next year. The fact that four MPC members voted for a cut in rates - and the hint from the governor that more cuts are coming - will contribute to speculation that the Bank may cut rates as soon as next month, shortly before Christmas..