LONDON (AP) — The Bank of England kept its main interest rate at the record low of 0.1% while warning Thursday that inflation is set to be double its target rate by the end of this year, largely due to a sharp spike in energy prices.
The decision from the central bank’s nine-member Monetary Policy Committee was unanimous, though two members voted to start reining in the bank’s stimulus program, which is aimed at keeping borrowing rates low in financial markets.
In the minutes for the committee’s meeting, the panel said developments over the past month had “strengthened” the case for some tightening of monetary policy in order to meet the central bank’s 2% inflation target sustainably in the medium term. However, it noted that “considerable uncertainties remain.”
Inflation in the U.K., which is currently running at 3.2%, is expected to hit 4% in the fourth quarter of this year and stay around that level into 2022. The rate-setting panel has in the past allowed inflation to run above target for quite a while if it perceives price pressures to be temporary.
Though the committee conceded that the rise in inflation could become embedded in the economy through higher wages, for example, it said its central expectation is that “current elevated global cost pressures will prove transitory.”
The two members who voted to bring an end to the bank’s 875 billion-pound ($1.2 trillion) asset purchase program as soon as practical rather than continuing it until the end of the year perceived “increasing evidence from a range of global and domestic cost and price indicators that inflationary pressures were likely to persist.”
In recent days, concerns about the inflationary outlook have mounted as a six-fold increase in wholesale gas prices has caused domestic energy bills to soar. Several small domestic energy suppliers have also gone bust as a result of the sudden pickup in prices.
A hike in demand after the British government eased lockdown restrictions also have contributed to the uptick in inflation, along with higher wages, global supply chain issues, a lack of drivers to transport goods and price increases related to Britain’s departure from the European Union.
The rate-setting panel also said that Britain’s economy lost some momentum during the summer, partly as a result of the spike in inflation and supply chain issues. Bank forecasters now expect third-quarter growth to be 2.1%, down from the previous forecast of 2.9% and below the 4.8% growth recorded in the second quarter. As a result, the British economy will remain around 2.5% below its pre-pandemic level.
With growth faltering, there are growing concerns about the impact on unemployment as the government’s salary support scheme, which protected millions of jobs during the pandemic, comes to an end at the end of September.
Under the program, the government paid 80% of the salaries of those workers unable to work because of lockdown measures. The program helped support around 12 million people, but the number has fallen to around 1.5 million as the lockdown restrictions on businesses were lifted.
What happens to those people still on furlough when the scheme ends remains one of the big uncertainties facing the economy, the committee said.
Given the headwinds facing the British economy, economists doubt there will be any changes in interest rates in the winter months, especially if the coronavirus backdrop worsens once again.
“The Bank will probably err on the side of caution for a while yet and wait until mid-year before lifting rates for the first time,” said Kallum Pickering, senior economist at Berenberg Bank.
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