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Bank of England predicts inflation to peak at over 4% this winter


UK inflation updates

The Bank of England has signalled additional concern about rising inflation, predicting on Thursday it was now likely to peak above 4 per cent and stay at this level into the second quarter of next year, but stressed that no immediate action was needed to quell price rises.

Voting unanimously to hold its main policy rate at the historic low of 0.1 per cent in its September meeting, the bank’s Monetary Policy Committee said its decision on interest rates would probably depend on what happened to unemployment and labour shortages after the furlough scheme winds up at the end of this month.

The committee indicated that rate rises were not imminent, but recent news on prices had “strengthened [the] case” for “modest tightening of monetary policy” over the next few years. As it made these comments the MPC also unanimously dropped previous guidance that it would not consider tightening policy until the economy had recovered materially from the pandemic.

Sterling was up 0.68 per cent against the US dollar to trade at $1.3717 in early afternoon trading on Thursday, after falling gently earlier in the week. After the BoE meeting, sterling bounced 0.44 per cent higher against the euro.

Analysts said the minutes of the meeting suggested the BoE was in a wait-and-see mode this autumn while the effects of the coronavirus pandemic unwound but was likely to raise interest rates in 2022.

Ruth Gregory, senior UK economist at consultancy Capital Economics, revised her view that there would be no interest rate rises next year at all after the minutes were published, even though the committee was inclined to wait for more information before it acted. “The MPC is getting closer to raising rates,” she said. “Our hunch right now is that the second half of the year seems more likely. But the clear risk is that it happens earlier.”

Samuel Tombs, UK economist at consultancy Pantheon Macroeconomics, said that if the furlough scheme ended without much sign of higher unemployment, “it is possible that the committee will hike interest rates in the first quarter, as soon as markets expect”.

By February, the MPC will have the data on the effect of ending the furlough scheme it said it wanted in the minutes to the September meeting, but would not have when it next gathers in November.

The committee split 7-2 on the question of whether to end its quantitative easing programme of asset purchases immediately, with the majority preferring to complete the current programme that will result in the BoE having purchased £895bn by the end of the year.

Michael Saunders, an external MPC member, continued to vote in favour of ending the purchases immediately, and he was joined by Sir Dave Ramsden, the BoE’s deputy governor for markets and banking.

The main change to the MPC’s thinking was that inflation would peak at a higher rate, with a greater risk that it would remain above the BoE’s 2 per cent target for most of next year.

Writing to the chancellor to explain the overshoot in inflation, Andrew Bailey, BoE governor, said that if the energy price cap rose materially again in April, “CPI inflation could remain above 4 per cent into [the second quarter of] 2022”.

The MPC was still minded to think that inflation would come down. “The committee’s central expectation continues to be that current elevated global cost pressures will prove transitory,” it said in its monetary policy statement.

But it did express concern that the longer inflation was significantly higher than its target, people and companies would come to expect more persistent higher inflation. Companies would then be more willing to raise prices to offset higher costs. “The committee would monitor very closely the risk that domestic and global demand and cost pressures could further affect medium-term inflation expectations,” the minutes said.

The Delta variant of coronavirus had dented the recovery over the summer, the MPC said, but this did not materially change its outlook on interest rates even though it would reduce the expected growth rate of the UK economy in the third quarter.

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