Today, the Bank of England warned that inflation will reach 5% next spring. However, they kept interest rates at their current level to protect economic recovery fears.
According to the latest Monetary Policy Committee report, CPI has already risen significantly to over 3 percent amid supply chain bottlenecks and rising energy prices.
It anticipates that the level will reach 5% by April, causing more pain for already-struggling families in light of the pandemic.
According to the MPC inflation will be slightly higher than its 2 per cent target within two years, although it should drop after that.
The Bank surprised the markets by not raising interest rates. However, Andrew Bailey, Governor of the Bank, stated that this will happen in the next few months.
He highlighted ‘near term uncertainties’ regarding the prospects for the economy and emphasized the impact of the furlough programme ending and energy price as two grey areas.
The Bank took a much more negative tone than usual about UK plc’s prospects, downgrading growth estimates this year to 7% from 7.25 percent, and to 6% to 5% next year.
The Bank surprised the markets by not raising interest rates. However, Andrew Bailey, Governor of the Bank, stated that this will happen in the next few months.
According to the latest Monetary Policy Committee Report, CPI has already risen significantly to over 3 percent amid supply chain bottlenecks and rising energy prices.
Sterling plunged by almost one cent against US dollar and euro, and British government bond markets soared due to the Bank’s announcement.
It delayed a rate rise despite warning gas and electricity tariff increases will see the Consumer Prices Index (CPI) leap from 3.1 per cent to 4.5 per cent by November and hit around 5% next April – its highest inflation forecast for a decade.
The Bank said: ‘The committee judged that… it would be necessary over coming months to increase Bank rate in order to return CPI inflation substantially to the 2 per cent target.’
The minutes showed that the Bank maintained its nerve on rates because most members wanted confirmation first from upcoming figures that unemployment has not risen significantly since the end of furlough assistance.
The MPC also chose to hold the Bank’s quantitative easing programme at £895billion, but the vote was split 6-3.
It said most MPC members believed there was ‘value in waiting for additional information on near-term developments in the labour market… before deciding when a tightening in monetary policy might be warranted’.
There are signs that the UK economy is slowing down as supply chain woes are holding back growth. Additionally, consumers spending has been more muted than expected.
The Bank has lowered its growth forecast for the 3rd quarter to 1.5 percent from the September prediction of 2.1 percent. This would be a sharp drop from the 5.5% growth between April and June.
It predicted that growth would be less than 1% in the fourth-quarter, which would leave overall gross domestic products (GDP) growing at 7% in 2021 compared to the August forecast of 7.25%.
The report indicates that it expects the UK to return to pre-Covid levels in the first quarter of 2022. This is contrary to the previous prediction of a recovery by the year’s end.
According to the Bank, ‘Growth can be somewhat restricted by disruptions in supply chains’
“Along with the rapid rise in global demand for goods, this has caused supply bottlenecks within certain sectors.
Rishi Sunak, Chancellor of India (pictured), stated that the government is concerned about the possibility of inflation spiraling out of control.
“There have also been some signs that the UK has a weaker consumption demand.”
The Bank said that growth would be’relatively slow’ starting in mid-2022. However, it has downgraded its GDP outlook for 2022 to 5% from 6% and kept it at 1.5% through 2023.
The report suggested that rate hikes are possible, but the Bank’s forecasts indicated that there would be more muted increases in financial markets than was expected.
It predicts that inflation will fall below its 2 percent target in three years if rates rise to around 1 percent by 2022, which is what the markets are predicting.
The report highlights a grim outlook for households facing rising prices in the next eight months. However, it maintained its outlook that the inflation spike would remain ‘transient’ and that it would ‘fall back materially by the second half of next Year’.
Supply chain problems that have been impacting a raft of sectors since the early summer are set to last until the end of next year – longer than the Bank first expected.
However, this too will fade by 2022.