On Thursday, the Bank of England announced that interest rates would likely rise in the following years.
The Bank has adopted an optimistic perspective on the short-term outlook for the UK’s
economy soon after coronavirus vaccine rollout and lifting restrictions.
The bank officials decided to keep the main interest rate at an all-time low of 0.1%.
“Some modest tightening of monetary policy” over the coming period “is likely to be
necessary to be consistent with meeting the inflation target sustainably in the medium
term,” stated the rate-setting Monetary Policy Committee.
Recent figures have shown the UK’s annual inflation rate at 2.5% after a sharp rise in energy prices.
According to the latest forecast, the Bank expects inflation to rise to 4% in 2021 against previous expectations of up to 2.5%.
The Bank’s main purpose would be to keep inflation down to 2% but often raises it higher
considering that temporary factors cause the rise.
Hesitation signals
The bank governor, Andrew Bailey said in a briefing, “There are good reasons to believe that above-target inflation will be temporary.”
“If this outlook appears to be in jeopardy, the MPC will not hesitate to act.”
So far, the committee of eight members has unanimously voted against increasing the rate.
The committee preserved the Bank’s currency stimulus at its current level, but one member
voted to reduce the purchases of the assets’ level from £875 billion to £830 billion.
With quarterly economic forecasts released on Thursday, the eight-member panel said, “a
waning impact” from COVID19 would support demand growth and help the economy reach
pre-pandemic levels later this year.
After the UK economic lockdown restrictions were lifted, the Bank said it expects a 7.25%
recovery this year, unchanged from previous forecasts.
However, it raised its forecast for next year from 5.75% to 6%.
The Bank has warned that the coronavirus delta variant infections have surged in the UK in
the last few months, and voluntary social distances could be a potential setback.
Generally, growth will be at a more normal rate in the coming months and years, which
would partly reflect less government spending due to the termination of many pandemic
programs like the salary support scheme.
It was uncertain how the economy would adapt to the end of the temporary layoffs scheme
introduced at the beginning of the pandemic in March last year to ensure unemployment
would not rise significantly if a lockdown was imposed.
The government paid workers who could not work due to lockdown 80% of their salaries.
The program is now being phased and is about to end in September.
It has supported over 11 million people, but many departments are opening, especially the
hospitality department, which lowered the number to two million people.
However, the unemployment rate, which was unspoken of, is relatively low, around 5%.
The Bank described an approach to remove economic stimulus when necessary. When men’s interest rates reach 0.5%, lower than the previous threshold, it will start disabling
the quantitative easing program.
The first interest rate rise could come next year at the earliest, economists said.
“If there is no other major wave of COVID19 during the winter and the economy performs
in line with the bank’s forecasts, the first-rate rise is likely to come in the spring or early
summer of next year,” said the chief economist at Deloitte, Ian Stewart.
