Concerns of a rise in inflation as the economy recovers from the pandemic have been dismissed by the Bank of England. In the year to May, consumer price inflation reached a two-year high of 2.1 percent, exceeding the Bank’s target of 2 percent. The Bank’s Monetary Policy Committee (MPC) has stated that it expects inflation to rise beyond 3% “for a limited time.” The MPC decided 9-0 to maintain the historic low-interest rate of 0.1 percent. Since March of last year, when they were cut to help mitigate the economic shock of Covid-19, rates have remained steady. The Bank stated that “financial market indicators of inflation expectations suggest that near-term inflation strength is projected to be transitory.”
The Bank of England’s primary interest rate-setting committee believes that high inflation is “transitory” and has not yet affected the need for sustained economic support. The global recovery has been greater than projected, and the UK’s growth expectations have been boosted for this year. The year has seen a significant increase in house prices. However, they are keeping their foot on the accelerator pedal due to uncertainty about the impact of the removal of furlough support on the economy, as well as the new pandemic type and other variables. Only Andy Haldane, the Bank’s retiring chief economist, sounded a note of caution, advising the Bank to buy £50 billion less in government bonds. He was outvoted 8-1 once more.
The recovery is undeniable, but there is a statistical haze surrounding what will actually happen in this extraordinary position. Rather than acting on inflation right now, the Bank’s decision-makers have decided to wait and see what happens to jobs and growth. The reopening rebound isn’t a bang. No, not yet. The Bank stated that it now expects the UK economy to rebound more quickly than previously anticipated. It predicted that output in June would be around 2.5 percent lower than pre-Covid levels. “Output in a number of industries has returned to pre-Covid levels, albeit it is still significantly lower in others.” “The housing market remains healthy, and consumer confidence indices have risen,” the report stated.
The MPC stated that delaying the full relaxation of Covid limits until July 19 would have “very minor” direct economic consequences compared to the impact of previous stages.
“The Committee’s central expectation is that the economy will experience a brief period of strong GDP growth and above-target CPI inflation, followed by a return to normal growth and inflation,” it continued. “There are two-sided dangers associated with this central path, and it’s feasible that near-term upward pressure on prices will be more than anticipated.” The Committee concludes that UK inflation expectations remain firmly anchored, based on data from financial market measures and polls of households, companies, and professional forecasters.”
