Bank of England raises inflation forecast but leaves interest rates unchanged at 0.1%

Summary

  • Bank of England has raised its inflation forecast but said it would be a temporary.
  • BoE expects that consumer prices would see a jump of 3 per cent.
  • The central bank left interest rates unchanged at a record low of 0.1 per cent.

UK’s banking regulator Bank of England (BoE) raised inflation forecast but said that increasing prices is a temporary phenomenon and voted unanimously to keep bank rates at a record low of 0.1 per cent.

BoE expects that consumer prices would see a jump of 3 per cent, which is higher by half a point than its estimate over a month ago. The rise would be driven primarily by an increase in commodity and energy prices. It expects that the effects would wear off, and that would give policymakers enough space to carry out the stimulus to the UK economy without any concerns.

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The stock of quantitative easing target has been kept at £895 billion as the Monetary Policy Committee remained cautious of UK’s economic recovery. Economist Andy Haldane, who would be stepping down this month from the nine-member committee, pushed for a reduction in the stimulus.

BoE said that it had no intentions of tightening policy rates without clear proof that inflation would stay above target for a long time. Panel members said that a lot of slack built up in the economy throughout the lockdowns, and as a result of which several businesses had to close due to the pandemic.

BoE said in a statement that a pickup in activities is expected to eliminate spare capacity in the economy with a temporary phase of excess demand. Inflation was expected to return in the medium term to about 2 per cent as these temporary effects wore off.

Experts were expecting policymakers to keep increasing house prices and inflation concerns aside in their announcements. But it admitted that recovery being witnessed globally was stronger than expected but maintained that the inflationary pressures would be transitory.

According to experts, UK’s CPI inflation would touch 3 per cent in the next few months but said it would drop towards 2 per cent.

The new inflation outlook of the central bank’s highlights concerns regarding consumer prices spiralling out of control. The Federal Reserve last week brought forward rate increase expectations, while central banks of the Czech Republic and Hungary have already increased borrowing costs. The yield of the sovereign 10-year bonds fell post the announcements.

In the third quarter unemployment rate is expected to reach 5.4 per cent and then would fall next year below the current 5 per cent, the BoE expects.


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