Economists now increasingly expect the Bank to move rates up early next year, sooner than previously thought.
That is far above the Bank’s 2% target rate.
While governor Andrew Bailey and colleagues insist the inflation rise will be temporary, a supply chain squeeze is beginning to unnerve Bank officials as well as businesses large and small.
Bailey today wrote a letter to Chancellor Rishi Sunak to explain the inflation situation. He said: ““Recent consumer price data have measured the change in prices relative to spring and summer 2020, when prices were particularly low, reflecting the impact of Covid.”
Sunak replied: “I agree with your assessment that the recent period of above target inflation is driven partially from base effects, rising commodity prices, global supply bottlenecks and shortages (particularly of semiconductors) and the increase in energy prices”
Rachel Winter at Killik & Co, said: “The consensus view is currently that UK interest rates will remain at their current record lows until at least the final quarter of 2022, and the Bank of England has today kept interest rates unchanged as expected. Low rates are good news for borrowers, and the UK government will no doubt be pleased that the costs of servicing its enlarged debt pile will not be rising. However, low rates are likely to continue stoking the UK’s rising inflation rate.”
The Bank wants to slowly withdraw its emergency support for the economy.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “As with other global central banks, and in-line with the Fed decision yesterday, the Bank of England is looking to wind down its QE operations now the worst of the pandemic is behind us. But the Bank also needs to ensure that inflation expectations among consumers and businesses remain under control while allowing the recovery to continue. Small and limited interest rate hikes next year remain a possibility.”
Hussain Mehdi at HSBC Asset Management said: “The Bank is now in wait-and-see mode, still providing a signal that tightening will be required in the coming quarters to keep inflation in check, but holding off any immediate action as it assesses near-term developments around Covid, the ending of furlough, and the persistence of supply-side disruptions including the recent spike in gas prices.”