Fears of a new year increase in interest rates receded yesterday after the Bank of England said the recent rise in inflation was temporary.
The Bank's monetary policy committee (MPC) raised the base rate by a quarter-point to 5.0 per cent, a five-year high, as had been widely predicted in the City.
The pound fell after the decision as analysts said that the statement issued by the Bank showed fewer worries about inflation than had been expected.
"It is likely that inflation will rise further above the target in the near term, but then fall back as energy and import-price inflation abate," it said.
It also flagged up the recent rise in unemployment and surprised analysts by not mentioning the risk of a surge in wage deals in the new year on the back of the recent rise in inflation.
"There appears to be little to suggest they feel further aggressive tightening is required," said James Knightley, a UK economist at ING Financial Markets. "We are yet to be convinced of the need [for it]."
The Bank cited "firm" economy growth, a moderate expansion in consumer spending, "rapid" growth in money supply and a continued rise in asset prices.
While the language was softer than the statement that accompanied August's rate rise, economists said that the Bank had left the door open for another rise in the new year.
The focus now shifts to the Bank's quarterly inflation forecasts that are published next week and the accompanying press conference with Mervyn King, the Governor.
The key issue will be whether the MPC backs the markets' forecast of one more rate rise. Philip Shaw, the chief UK economist at Investec, said: "We suspect the Bank will not provide clear hints over the likelihood of rates needing to rise, as it did in May and August."
But Roger Bootle, an economic adviser to the accountants Deloitte, warned that with further rises in utility bills and university tuition fees still in the pipeline, inflation had yet to peak. He said the Bank would be worried that money supply growth, currently rising at 16 per cent a year, was a harbinger of further rises in house prices.
"The Committee appears very keen to pull out all the stops to ensure that rising inflation does not spill over into higher wage growth and a pick-up in inflation expectations," he said. "It is likely interest rates will have to rise to 5.25 per cent early next year in order to keep inflation under control."
There was further support for that view after figures from the Halifax bank showed that house prices rose by 1.7 per cent - the third month in a row of above 1 per cent growth - to take the annual rate to 8.6 per cent.
However, separate figures on trade yesterday indicated that the UK's external position would act as a drag on growth.
Official figures showed yesterday that exports fell while imports rose over the summer. Stripping out the impact of the so-called "missing trader" fraud, exports in the three months to September fell by 4.9 per cent, while imports rose a fraction.