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Recovery likely to push inflation above 3% by end of year, says Bank

·4 min read
<span>Photograph: Kirsty O’Connor/PA</span>
Photograph: Kirsty O’Connor/PA

The Bank of England expects the strength of Britain’s economic recovery to push inflation above 3% by the end of the year before falling back in 2022 as the post-Covid boom slows down.

Policymakers on Threadneedle Street’s monetary policy committee (MPC), who have come under pressure to signal when interest rates will rise in response to higher levels of inflation, said the Bank’s base rate should remain at 0.1% until the economic outlook was more certain.

In a report that followed the committee’s June meeting, it said inflation was “likely to exceed 3% for a temporary period”. At its May meeting the committee had said inflation could reach 2.5% by the end of the year.

The Bank also said growth in the second quarter would be about 1.5% higher than previously expected but kept its full-year forecast unchanged at 7.25%. A faster vaccination rate, increased consumer confidence and a strong housing market were all factors supporting the higher estimate for GDP in Q2, the committee said.

However, the boom is expected to be short-lived and more moderate growth and stable levels of inflation are forecast to resume next year.

“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,” it said.

Paul Dales, chief UK economist at the consultancy Capital Economics, said a fall in inflation next year would most likely delay any interest rate rise until 2024.

“The key point is that the MPC still appears willing to ride out the inevitable rise in inflation over the next six months as it thinks it will be short-lived,” he said.

The Bank also said it would keep its programme of electronic money printing, known as quantitative easing, in place to keep the recovery on track through the autumn.

Chief economist Andy Haldane was the only member of the MPC to vote to taper the QE programme before it reached £875bn, in line with his vote at the committee’s last meeting in May.

The MPC said rapid progress with the Covid-19 vaccine and the easing of restrictions had paved the way for a surge in spending as consumers begin to visit previously closed restaurants, cafes and leisure facilities.

Inflation has increased in recent months, with official figures estimating that it reached 2.1% in May, slightly above the Bank’s 2% target level.

Sarah Coles, a personal finance analyst, at Hargreaves Lansdown, said higher inflation would depress returns on savings.

“Inflation is set to go above 3% this summer, dealing yet another horrible blow to savers. Right now, however long you’re prepared to fix your savings for, you can’t get more than 1.65%.

The Bank – and most City economists - had estimated previously that inflation would peak at below 3% this year before falling back in 2022 to about 2%, though some analysts have warned it could reach 4%.

In 2011 the UK’s inflation rate hit 5.2% as the economy recovered from the 2008 banking crash, before falling back in subsequent years.

Jonathan Gillham, chief economist at the consultancy PwC, said: “There is evidence that pent up consumer demand is causing price pressure in the manufacturing sector, but this should be balanced against the fact that many households have struggled financially through lockdown and may well be more cautious going forwards.

“This implies that the inflation pathway over the next few months could be quite choppy, with strong push and pull factors on both sides. Any interest rate response to this uncertainty could be premature.”

Haldane, who will leave the Bank next week, has warned that inflation could become elevated and persistent, undermining the MPC’s efforts to bring it back to its 2% target.

It is understood that Haldane believes that his forecasts of a strong “V-shaped” recovery have been vindicated and his warnings of a return of 1970s-style inflationary pressures should be heeded by his colleagues. However, the other members of the nine-strong MPC have consistently voted to maintain the bank’s stimulus programme, believing that businesses and households will need to be supported until the recovery is entrenched.


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