Thu, 5 August 2021 | Written By: Alec Malloy
Alec Malloy is a content writer with over 7 years’ experience spanning a range of commercial sectors.
The Bank of England today confirmed it would continue with its economy-boosting measures but said higher inflation is on the way.
Today, the Bank of England Monetary Policy Committee (MPC) voted to keep the historic low-interest rate in place. There will be no move from the current 0.1% base rate. Additionally, members voted 7-1 to keep the £895bn quantitative easing programme in place.
Policymakers struck a cautiously optimistic tone at today’s Bank of England press conference. However, Governor Bailey and council members did signal policy will be subject to modest tightening from here on out.
The BoE also raised its inflation forecasts. Economists were expecting this, given CPI has passed targets for two consecutive months.
In its monetary policy report, the Bank of England said: “Overall, Bank staff now expect inflation to rise materially further in the near term, temporarily reaching 4% in 2021 Q4 and 2022 Q1, 1½ percentage points higher than in the May projection.”
The report also outlined that the recent acceleration in CPI inflation is mainly due to volatility in energy and the prices of other goods. In the medium term, the Bank said it expects inflation to peter out and fall back to around its current 2% target.
Looking to GDP, the BoE forecasts 5% growth in Q2 2021 after a 1.6% contraction in the first quarter. This is slightly above what the Bank predicted in its May report. Even so, this would leave UK GDP some 4% lower than pre-pandemic levels.
GDP growth is forecast at 3% for Q3, in response to thousands of workers needing to isolate after Delta variant COVID-19 cases surged across the UK in recent weeks. However, COVID cases and hospitalisations have broadly fallen in the last month, giving some hope that the “pingdemic” is just a bump on the road to recovery.
According to the MPC, the economy will return to its pre-pandemic levels in the last quarter of the year. The pandemic’s impact is expected to have substantially lessened by then. At this time, GDP growth will cool and return to levels more normally seen in mature economies.
Quantitative easing-related purchases will be scaled back once the base rate reaches 0.5%, according to today’s policy outlook. At this time, the Bank will stop investing in maturing UK government bonds, but only if economic conditions are good enough.
This rate is substantially lower than the 1.5% rate earmarked in 2018.
In its policy report, the MPC forecast that its main interest rate would reach 0.5% in the third quarter of 2024, after hitting 0.2% in the third quarter of 2022 and 0.4% for the same period in 2023.
This comes after the Bank of England was recently dubbed “addicted to QE” by a House of Lords committee – something which Governor Bailey strenuously denies.
In all, a fairly positive report for the UK then. Sterling was up around the $1.925 level against the dollar after the Bank’s plans were made public and continued to build momentum at writing.
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