ECONOMY

Bank of England says inflation likely to rise above 3%

The Bank of England has said that prices are increasing faster than it expected and inflation is likely to rise above 3 per cent in the months ahead, but added that the problem is “transitory” and should not affect monetary policy.

The UK central bank’s message on Thursday came after data had shown inflation rising much faster than it had previously forecast as the economy rebounded more strongly than anticipated.

Sticking to its guns with exceptionally loose policy, the BoE’s Monetary Policy Committee signalled that it needed to wait for inflation to subside rather than take action.

“The committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back,” the MPC said in its summary of the meeting, adding that it thought there were upside and downside risks ahead on inflation.

It said that inflation would rise further from the 2.1 per cent recorded in May and “is likely to exceed 3 per cent for a temporary period”.

UK government bond prices rallied and sterling fell after the central bank’s policy decision. The UK currency was down 0.3 per cent against the US dollar at $1.3918 and off 0.5 per cent against the euro at €1.1651. The 10-year gilt yield fell 0.03 percentage points to 0.75 per cent.

The committee voted unanimously to keep interest rates at 0.1 per cent and by a margin of 8 to 1 to stick to the current programme of asset purchases until the end of the year, which is set to raise the total amount of quantitative easing to £895bn.

In his last meeting before departing the BoE, Andy Haldane, chief economist, voted against the majority for the second meeting in a row, seeking to limit the total amount of quantitative easing to £845bn.

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