Bank of England edges up inflation outlook

The Bank of England's Monetary Policy Committee has voted to keep interest rates at 0.1 per cent.
The Bank of England's Monetary Policy Committee has voted to keep interest rates at 0.1 per cent.

The Bank of England says inflation will rise above 4 per cent later this year, and two policymakers called for an early end to the central bank's quantitative easing program due to rising price pressures.

Policymakers voted 7-2 to stick with the STG895 billion asset purchase target they set in November 2020, when the BoE's Monetary Policy Committee decided to buy a further STG150 billion of government bonds over the course of 2021.

BoE Deputy Governor Dave Ramsden joined Michael Saunders in voting for an early end to the program of bond purchases.

The MPC voted unanimously to keep interest rates at 0.1 per cent.

The BoE said it had revised down its expectations for the level of gross domestic product in the third quarter by around 1 per cent from the August report, reflecting supply constraints.

But it said inflation would "temporarily" rise above 4 per cent in the final quarter of the year.

"Since the August MPC meeting, the pace of recovery of global activity has showed signs of slowing. Against a backdrop of robust goods demand and continuing supply constraints, global inflationary pressures have remained strong and there are some signs that cost pressures may prove more persistent," the BoE said.

Last month, the BoE said it expected the economy to regain its pre-pandemic size in the final three months of 2021 and inflation to hit a 10-year high of 4 per cent at the same time.

British consumer price inflation hit a nine-year high of 3.2 per cent in August, but the rebound from the COVID-19 pandemic has slowed and some economists see a risk of higher unemployment when furlough support stops at the end of this month.

Before Thursday's decision, interest rate futures priced in a more than 60 per cent chance of a rate rise to 0.25 per cent in February next year, and a high chance of a further rate rise to 0.5 per cent by the end of 2022.

Most economists polled by Reuters earlier this month thought the BoE would raise rates only once, relatively late in 2022.

Australian Associated Press