Bank of England shrugs off inflation fearson June 24, 2021 at 11:33 am

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Bank policymakers keep rates steady despite concerns of an inflation surge in the wake of the pandemic.

Bank of England

image copyrightReuters

The Bank of England has shrugged off concerns that inflation could surge as the economy returns to normal after the pandemic.

Consumer price inflation hit a two-year high of 2.1% in the year to May, exceeding the Bank’s 2% target.

But in its latest statement, the Bank’s Monetary Policy Committee (MPC) said the effect would be temporary.

The MPC voted 9-0 to keep interest rates steady at the historic low of 0.1%.

Rates have been unchanged since March last year, when they were reduced to help contain the economic shock of Covid-19.

MPC members also voted 8-1 to continue with the Bank’s existing asset purchase scheme, maintaining its government bond-buying target at £875bn.

“Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory,” the Bank said.

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Analysis box by Faisal Islam, economics editor

High inflation is “transitory” and has not yet affected the need for ongoing stimulus of the economy – that is the judgement of the Bank of England’s key interest rate-setting committee.

The recovery around the world has been stronger than expected and the UK’s growth prospects this year have been upgraded. House prices are strongly up in the year. However, uncertainty over the impact on the economy of the withdrawal of furlough support, the new pandemic variant and other factors means they are keeping their foot on the accelerator pedal.

Only departing chief economist Andy Haldane sounded a note of caution, saying the Bank should buy £50bn less in government bonds. He was again outvoted 8-1.

The bounce back is certainly real, but there is a statistical fog about what actually happens in this unprecedented situation. The Bank’s decision-makers have decided to wait and see what actually happens to jobs and growth, rather than act now on inflation. The reopening bounce back is not a boom. Not yet.

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The Bank said it now expected the UK economy to recover faster than it had previously predicted.

It said output in June was now expected to be about 2.5% below its pre-Covid level.

“Output in a number of sectors is now around pre-Covid levels, although it remains materially below in others. The housing market remains strong, and indicators of consumer confidence have increased,” it said.

The MPC said the direct economic implications of delaying the final relaxation of Covid restrictions to 19 July was likely to be “relatively small” compared with the impact of previous stages.

“The Committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back,” it added.

“There are two-sided risks around this central path, and it is possible that near-term upward pressure on prices could prove somewhat larger than expected.

“Taking together the evidence from financial market measures and surveys of households, businesses and professional forecasters, the Committee judges that UK inflation expectations remain well anchored.”

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