Bank of England warns gas prices will help push inflation over 4 per cent this year and downgrades Covid recovery forecasts as it keeps interest rates on hold at 0.1%
- Bank of England highlighted inflationary pressures in the latest MPC report
- MPC said rate likely to go above 4 per cent this year but should be ‘transitory’
- Growth expectations lowered as interest rates kept on hold at just 0.1 per cent
The Bank of England set nerves jangling about rising inflation today as it admitted soaring gas prices and supply chain problems will add to the pressures.
The latest report by the Monetary Policy Committee said CPI inflation is now expected to be ‘slightly above’ 4 per cent in the fourth quarter of the year.
Although the surge is still expected to be ‘transitory’, it warned that developments over the past month – including the energy crisis – have ‘strengthened’ the view that action will be need to return to the target of 2 per cent.
The rate could remain above 4 per cent into the second quarter of next year, the committee said.
Bank staff have also revised down their expectations for the recovery, with GDP still set to be 2.5 per cent below its pre-Covid level in the third quarter of this year.
The MPC kept interest rates on hold at 0.1 per cent and the quantitative easing programme at £895billion.
Bank of England governor Andrew Bailey has insisted inflation will subside over the medium term despite mounting concerns
The MPC said the downward revision on GDP ‘in part reflects the emergence of some supply constraints on output’.
The report said developments over the past month have ‘strengthened’ the case made in August that some tightening of monetary policy could be necessary to meet the central bank’s 2 per cent inflation target sustainably in the medium term.
The headline CPI rate spiked in August to 3.2 percent, the highest in nearly a decade, after the Covid-hit economy reopened.
However, the MPC added that ‘considerable uncertainties remain’.
‘Against a backdrop of robust goods demand and continuing supply constraints, global inflationary pressures had remained strong and there were some signs that cost pressures might prove more persistent,’ the minutes said.
‘Oil prices had remained elevated and global shipping costs had continued to rise. Wholesale gas prices had risen substantially across Europe.’
The report said that inflation will be ‘slightly higher than the projection in the August Report’ of 4 per cent.
‘Around half of the near-term projected above-target inflation was expected to be accounted for by elevated energy price inflation,’ the MPC said.
‘The projected contribution of energy prices from October 2021 reflected a base effect as well as Ofgem’s most recent announced increases in the standard variable tariff caps on retail gas and electricity prices.
‘Spot and forward wholesale gas prices had risen materially since the publication of the August Report, against a backdrop of strong demand and some supply disruption.
‘This could represent a significant upside risk to the MPC’s inflation projection from April 2022, when Ofgem next updated its retail energy price caps based on the relevant forward contracts, and meant that CPI inflation would remain slightly above 4 per cent into 2022 Q2, all else equal.’
The Bank stressed that it will monitor developments in the labour market, including the impact of cost increases on business and employees.
The MPC’s nine members voted unanimously in favour of holding rates at 0.1 per cent.
The central bank will also keep up its £895billion quantitative easing programme following a seven to two vote in favour.
Committee members Michael Saunders and Dave Ramsden voted against, calling for a cut to £860billion.
Official figures showed the CPI rate spiked to 3.2 per cent in August, well above the Bank’s 2 per cent target