Inflation will spike to 4 per cent by the end of this year, according to the Bank of England in its latest update on Thursday, but interest rates are set to remain at a historic low of 0.1 per cent.
The Bank expects to overshoot its target of 2 per cent, which is down to an increase in energy and goods prices.
Members of the Monetary Policy Committee (MPC) voted on Wednesday by a majority of 7 to 1 to continue with its £150 billion programme to purchase Government debt caused by the pandemic. The committee agreed to extend its Quantitative Easing (QE) programme but signalled a path to winding down the programme, ahead of rate rises. The MPC intends to cut its stock assets once Bank Rate rises to 0.5 per cent.
“The Committee’s central expectation is that current elevated global and domestic cost pressures will prove transitory,” the Bank said in a statement.
But it also warned that the economy is projected to experience “a more pronounced period of above-target inflation” in the near term than expected in the May Report.
“Modest tightening of monetary policy is likely to be necessary”, it concluded, in order to meet inflation targets and help shore up the country’s economic recovery over the coming years.
The Bank’s Monetary Policy Report (MPR) also predicts that the economy will grow by 7.25 per cent in 2021, in line with May’s forecast. Meanwhile, growth in 2022 may be more than 6 per cent, higher than spring’s forecast which predicted 5.75 per cent.
Doug McWilliams, head of the Centre for Economics and Business Research, has told Reaction that darker days may lie ahead: “The MPC has still kept its foot hard on the accelerator at a time when UK growth this year is set for near record levels and inflationary pressures are welling up with shortages of many products and skills.”
“Inflation over the next 18 months is a done deal, ” he warned, and “the question is whether policy is tightened sufficiently rapidly to prevent a boom-and-bust cycle. At present such a cycle seems more likely than not”.
