The U.K. central bank once again left its main interest rates and target for asset purchases unchanged, but raised its forecast for economic growth and inflation in the current quarter and expects inflation to exceed 3.0 percent temporarily before dropping back toward its target.
The Bank of England’s (BOE) nine-member monetary policy committee voted unanimously to maintain its bank rate at a rock-bottom 0.10 percent but for the second time Chief Economist Andy Haldane, who leaves at the end of this month, voted to trim the asset purchase program by by 50 billion sterling from the 895 billion target for total asset purchases.
The policy committee also reiterated “it does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 percent inflation target sustainably.”
The BOE has kept its rate steady since March 2020, when it was cut twice by a total of 65 basis points, along with its target for asset purchases that was last raised in November last year.
BOE acknowledged the global economy was recovering faster than expected and price pressures were rising, reflecting strong demand for goods, rising commodity prices, supply-side constraints and transportation bottlenecks.
But as many central banks, such as the U.S. Federal Reserve and the European Central Bank (ECB), BOE believes the impact of the rise in commodity prices to be transitory and after the economy experiences a “temporary period of strong GDP growth and above-target CPI inflation,” growth and inflation will fall back.
However, it cautioned this forecast is surrounded by risks, saying “it is possible that near-term upward pressure on prices could prove somewhat larger than expected,” echoing concern by some members of the Fed’s policy-setting body.
Reflecting the improving outlook for growth due to an easing of COVID-19 restrictions, the bank’s staff revised upwards its forecast for economic growth in the United Kingdom in the second quarter to 5.5 percent from the May forecast of 4.25 percent.
In May BOE forecast a 7.25 percent expansion in gross domestic product this year, up from a 9.75 percent contraction in 2020, with the pace easing to 5.75 percent in 2022. In August BOE will issue its next monetary policy report with economic outlooks.
Inflation in the UK rose to 2.1 percent in May – above BOE’s target and the May forecast of 1.8 percent – and the bank expects headline inflation to rise further above the target and exceed 3.0 percent for a “temporary period” due to higher energy and commodity prices.
But as the “transitory effects” fade, BOE expects inflation to return to its 2.0 percent target in the medium term.
In its May policy report, BOE forecast headline inflation would rise temporarily above its target towards the end of 2021 due to higher energy costs and projected inflation of 1.7 percent in the second quarter of this year, 2.3 percent in the second quarter of 2022 and 2.0 percent in the second quarter of 2023.
