Bank of England keeps interest rates at 0.25 per cent, but inflation set to rise

The Bank of England leaves interest rates at the record low of 0.25%, while warning that inflation is expected to reach its target of 2% in 2017.

The vote by the Monetary Policy Committee (MPC) was unanimously in favour of keeping Bank Rate at 0.25% at its meeting yesterday.

Bank Rate has now been at the historic low of 0.25% since it was cut from 0.5% in August this year.

Minutes of the meeting said that given that little had changed since the MPC had published November’s inflation report, the committee saw no reason to change current policy.

It therefore confirmed that it will also maintain the current programme of quantitative easing, which includes the purchase £60bn of additional government bonds and a scheme of buying corporate bonds worth £10bn.

The minutes also indicated that household real income growth is expected to slow, and household spending is expected to weaken early next year. Business activity may also be affected as UK firms experience reduced access to EU markets.

Explaining that he expected the MPC to continue to hold borrowing costs for the near future, Ian Shepherdson, chief economist at the consultancy Pantheon Macroeconomics said,

“Growth is expected to slow and the MPC’s base case remains that higher inflation will not become embedded into wages and inflation expectations - some measures of which have risen, they noted - so the Bank can continue to look through the inflation spike. We think Bank Rate will be on hold throughout 2017.”

The MPC also noted that it expects unemployment to rise to approximately 5.5% by mid-2018 and for this level to be maintained throughout 2019.

Meanwhile, Consumer Price Index (CPI) inflation is expected to rise to 2.75% in 2018 due to the depreciation of sterling. It is then expected to fall to 2.5% in 2019.

The Committee said that the global outlook has become more fragile, with risks in China, the euro area and some emerging markets. In terms of the domestic outlook, a slowdown in activity is expected during 2017, but the scale of this will be dependent on how well household spending bears up against the pressure of rising inflation.

The inflation figure for November currently stands at 1.2%, with the MPC expecting it to reach its target figure of 2% over the next six months, while it may over shoot the target in 2017 and 2018.

“Since the Committee’s previous meeting, sterling’s trade-weighted exchange rate has appreciated by over 6%, while dollar oil prices have risen by 14%. All else equal, this would result in a slightly lower path for inflation than envisaged in the November inflation report, though it is still likely to overshoot the target later in 2017 and through 2018,”

the minutes said.


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