BoE keeps low rate, sees ‘temporary’ inflation spike

LONDON - The Bank of England on Thursday kept its main interest rate at a record-low level, but warned that inflation would temporarily spike above 3.0% as the economy reopens.

The decision comes as the world’s top central banks grapple with fears of an inflationary spike, fuelled by commodity price gains and worries over the health of post-Covid economic recovery.

The BoE’s monetary policy committee (MPC) announced in a statement that it has frozen borrowing costs at 0.1%, and also maintained its stimulus amount.

The pound dipped slightly against the dollar and euro after the decisions, which were in line with market expectations.

“The committee’s expectation is that the direct impact of rises in commodity prices on CPI inflation will be transitory,” read minutes from the gathering.

“More generally, the central expectation is that the economy will experience a temporary period of strong GDP growth and abovetarget CPI inflation, after which growth and inflation will fall back.”

Consumer Prices Index (CPI) inflation was set to shoot further above the central bank’s 2.0% official target.

“Inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and is likely to exceed 3.0% for a temporary period,” the BoE warned.

The BoE’s assessment broadly mirrors that of both the US Federal Reserve and the European Central Bank, which both kept their own ultra-low rates and economic support measures intact in recent weeks, insisting also that high inflation would be temporary.

UK inflation in May hit 2.1% the highest level since before the pandemic - with clothing, fuel and oil prices rebounding as the economy gradually reopens.

The BoE remains keen not to snub out any nascent economic recovery by raising rates too soon, following a raft of encouraging data for the period.

“The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2.0% inflation target sustainably,” it added yesterday.

Inflation in Britain has nevertheless accelerated sharply since March, when the government began a phased lifting of coronavirus restrictions.

The economy is set to fully reopen on 19 July after the government recently delayed the date by four weeks due to surging Delta infections.

When the deadly Covid-19 pandemic erupted in March 2020, the BoE slashed its interest rate to 0.1%, where it has remained ever since.

The BoE also started injecting vast sums of money to stimulate economic growth. Its total Quantitative Easing (QE) stimulus package currently stands at £895 billion.

The bank’s chief task is to use monetary policy to keep inflation close to target in order to preserve the value of money.