Priya Patel
TLDR:
The Bank of England is expected to hold interest rates steady despite the improving inflation backdrop in the UK. Economists predict that the central bank’s Monetary Policy Committee (MPC) will keep rates at 0.1% after its meeting this week. This comes as inflation in the UK rose to 2.5% in June, surpassing the central bank’s target of 2%, due to temporary factors such as the reopening of the economy. However, the MPC is expected to look through these temporary factors and maintain its accommodative policy stance.
Key points:
- The Bank of England is expected to keep interest rates steady at 0.1% despite rising inflation.
- Inflation in the UK rose to 2.5% in June, surpassing the central bank’s target of 2%.
- Economists expect the central bank to maintain its accommodative policy stance due to temporary factors driving inflation higher.
Economists predict that the Bank of England’s Monetary Policy Committee (MPC) will not raise interest rates despite the improving inflation backdrop in the UK. Inflation in the UK rose to 2.5% in June, exceeding the central bank’s target of 2%. However, economists believe that this increase is driven by temporary factors such as the reopening of the economy and higher energy prices, and therefore the MPC is expected to look through this temporary inflationary pressure.
The MPC is likely to maintain its accommodative policy stance to support the UK’s economic recovery from the COVID-19 pandemic. The central bank has previously stated that it will tolerate a temporary period of above-target inflation as the economy bounces back from the effects of the pandemic. As a result, interest rates are expected to remain at their historic low of 0.1% for the foreseeable future.
While inflation has surpassed the central bank’s target, other economic indicators suggest that the recovery is still fragile. The UK’s GDP growth slowed in May, and the unemployment rate remains elevated despite recent improvements. Given these factors, the MPC is expected to prioritize supporting the economic recovery over addressing the temporary rise in inflation.
However, some economists argue that the Bank of England may need to tighten monetary policy sooner than anticipated if inflationary pressures persist. Factors such as higher wage growth and ongoing supply chain disruptions could lead to sustained inflation in the coming months. The ECB’s recent decision to gradually reduce its bond-buying program also raises the possibility of tighter monetary policy in the future.
In summary, although inflation in the UK has surpassed the Bank of England’s target, economists expect the central bank to maintain its accommodative policy stance to support the economic recovery. The MPC is likely to look through the temporary factors driving inflation higher and prioritize the fragile economic outlook. However, if inflationary pressures persist, the central bank may need to consider tightening monetary policy sooner than expected.
