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

Bank of England 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 over the winter, but it said that rising prices did not yet warrant higher interest rates because they would moderate next year.

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 that the economic recovery from coronavirus had progressed sufficiently to start considering whether to end the emergency setting for interest rates in the months ahead.

But the committee indicated that rate rises were not imminent. Although it said that recent news on prices had “strengthened [the] case” for “modest tightening of monetary policy” over the next few years, it would still need to be convinced that high inflation was a persistent problem for rapid action to tame prices.

The committee split 7-2 on the question 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 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. The committee still judged this process would not become a prolonged problem.

“The committee’s central expectation continues to be that current elevated global cost pressures will prove transitory,” the BoE said in its monetary policy statement.

It added that consumer and business spending had weakened during the summer as the Delta wave of coronavirus spread across the country.

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