Bank of England warns inflation will reach 4% this year but keeps interest rates | interest rates

[ad_1]

The Bank of England forecast UK inflation to reach 4% by the end of this year, leaving interest rates at a historic low of 0.1%.

Central bank policymakers expect UK inflation to rise to 4% in the last quarter of 2021, double the bank’s 2% target, largely due to higher energy and other commodity prices. Inflation was 2.5% in June, and the bank forecast in June that it would rise above 3% this year.

He also noted that “some modest monetary tightening will likely be necessary” over the next two years.

But policymakers have resisted pressure to raise the cost of borrowing to cool price hikes, saying the increase in inflation will be temporary and is expected to dip toward its 2% target next year.

CPI inflation has risen significantly, well above the MPC’s 2% target, and is expected to rise temporarily to 4% in the near term. In its latest monetary policy report, the bank said the rise largely reflects the impact of the pandemic as the economy recovers.

This has led to higher energy and commodity prices, which in turn reflects higher commodity prices, transportation bottlenecks, production constraints and strong global demand for commodities. As such, inflation is expected to be temporarily above target, as commodity prices stabilize, supply shortfalls ease and global demand returns to equilibrium.

As a result, inflation is expected to ease, and is expected to return close to the 2% target over the medium term, provided that is conditional on the market path of interest rates.

Officials maintained a £895 billion stimulus program that lowered long-term interest rates. The bank is set to buy another 50 billion pounds of government bonds as part of its quantitative easing (QE) scheme by the end of the year.

However, a split opened in the committee, as one member, Michael Saunders, voted to end QE early. Saunders warned last month that rising inflation pressures could prompt the bank to rein in some of its stimulus programme.

The bank still expects the British economy to grow by 7.25% in 2021, unchanged from its May forecast. It now expects 6% growth in 2022, slightly above its previous forecast of 5.75%.

He predicted UK gross domestic product would rise 5% in April and June, higher than forecast three months ago, as the easing of lockdown restrictions boosted growth. But it also cautioned that recent developments in the pandemic mean growth in the third quarter of 2021 will be “somewhat weaker than expected in the May report” at 3%, noting the “sharp increase in the number of people claiming themselves to be ‘temporarily isolated’.” Since its last meeting in late June.

The bank also indicated that interest rates may rise earlier than previously expected.

“The Committee judges that, should the economy broadly develop in line with the central forecast in the August Monetary Policy Report, it is likely that some modest tightening of monetary policy will be necessary during the forecast period to be consistent with achieving the inflation target sustainably in the medium term. “”.

It also explained how it plans to wean the UK economy off quantitative easing. The MPC intends to start reducing its stock of assets by not reinvesting maturing bonds once the bank rate rises to 0.5%.

Hugh Jimber, global market strategist at JP Morgan Asset Management, said the UK’s domestic outlook is strong, but “the uncertainty associated with the delta variable and the phasing out of the holiday scheme” has made policy makers wary of any early withdrawal of support.

Subscribe to the daily Business Today email

Ruth Gregory of Capital Economics said the bank used its economic forecasts to deliver a more optimistic message about the economic outlook.

In fact, while the economy is still expected to recover its pre-pandemic peak in the fourth quarter of 2019 in the fourth quarter, the bank now believes that instead of peaking at 5.4% in the third quarter, the peak of the unemployment rate has already occurred, she said. “.

“Speaking of the mechanics of tightening policy, this is another sign that tightening is approaching,” she added.

[ad_2]