New cost of living squeeze as Bank of England warns inflation will hit 5 PER CENT next spring: CPI could stay above 2 per cent target for TWO YEARS – but interest rates are kept on hold for now with fears economic recovery is slowing
- Bank of England has surprised markets by keeping interest rates on hold at 0.1%
- MPC report warns that the CPI inflation rate is likely to reach 5 per cent in April
- CPI is still expected to be above the Bank’s 2 per cent target in two years’ time
The Bank of England today warned that inflation is set to hit 5 per cent next spring but kept interest rates on hold for now amid fears the economic recovery is weakening.
The latest Monetary Policy Committee report says CPI has already ‘risen markedly’ to more than 3 per cent amid supply chain ‘bottlenecks’ and soaring energy prices.
It expects the level to reach 5 per cent by April, inflicting more pain on already-struggling families in the wake of the pandemic.
The MPC believes inflation will still be ‘a little’ above its 2 per cent target in two years’ time – although it should dip lower after that.
The Bank shocked the markets by holding off on raising interest rates, but at a press conference governor Andrew Bailey made clear that that will happen in the coming months.
He pointed to ‘near-term uncertainties’ over the prospects for the economy, highlighting the impact of the furlough scheme ending and energy prices as two grey areas.
The Bank struck a considerably gloomer tone on UK plc’s prospects than before, downgrading growth estimates for this year to 7 per cent from 7.25 per cent, and from 6 per cent to 5 per cent next year.
The Bank shocked the markets by holding off on raising interest rates, but at a press conference governor Andrew Bailey made clear that that will happen in the coming months
The latest Monetary Policy Committee report says CPI has already ‘risen markedly’ to more than 3 per cent amid supply chain ‘bottlenecks’ and soaring energy prices
Sterling slumped by almost a cent against the US dollar and the euro, and British government bond prices leapt as investors were wrong-footed by 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 the Bank held its nerve on rates as most members wanted confirmation first from upcoming official figures that unemployment has not jumped markedly higher following the end of furlough support.
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’.
Policymakers were also concerned over signs the UK economy is flagging as supply chain woes hold back growth, with consumer spending also proving more muted than expected.
The Bank slashed its growth forecast for the third quarter to 1.5 per cent from 2.1 per cent predicted in September. This would mark a steep drop from the 5.5% growth notched up between April and June.
It forecast growth would ease back further to 1 per cent in the fourth quarter, leaving overall gross domestic product (GDP) growth at 7 per cent in 2021 against the 7.25% predicted in August.
The report shows it now expects the UK economy to return to its pre-Covid level by the first quarter of 2022, against a previous prediction for a recovery by the year end.
‘Growth is somewhat restrained by disruption in supply chains,’ the Bank said.
‘Alongside the rapid pace at which global demand for goods has risen, this has led to supply bottlenecks in certain sectors.
Chancellor Rishi Sunak (pictured) has said the government is vigilant on the threat of inflation getting out of control
‘There has also been some signs of weaker UK consumption demand.’
The Bank said growth was set to be ‘relatively subdued’ from mid-2022 onwards as it downgraded its GDP outlook to 5% in 2022 from 6%, but kept it unchanged at 1.5% for 2023.
While the report showed rate hikes were likely on the way, the Bank’s forecasts suggested more muted increases than expected in financial markets.
It predicts that inflation would undershoot its 2 per cent target in three years’ time if rates rose to around 1 per cent by the end of 2022, as markets are pencilling in.
The report outlines a gloomy eight months for households from rising prices, but it stuck by its outlook that the inflation spike will remain ‘transient’ and will ‘fall back materially from 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.
But that too is set to fade from the end of 2022.
Source: Read Full Article