The Bank of England (BoE) voted unanimously to leave interest rates at record lows of 0.1% despite concerns of rising inflation.
In a move that was widely expected, it also maintained the target stock of quantitative easing (QE) at £895bn ($1.2tn) as the Monetary Policy Committee (MPC) remains cautiously optimistic about the UK economic recovery.
Andy Haldane, the Bank’s outgoing chief economist, was the only member to vote for curtailing this round of QE early, holding at £100bn instead of completing the bond purchases set out in November.
City analysts expected policy makers to largely ignore increasing inflation and soaring house prices in Thursday’s announcement. However, the Bank said it acknowledges that global recovery is “somewhat stronger than anticipated” and judges that inflationary pressures to be “transitory”.
It said it expects UK CPI inflation to rise to 3% in the coming months, but insists it will then drop down towards its 2% target as stimulus is kept in place.
"CPI 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% for a temporary period," the Bank said in its statement.
"More generally, 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."
Last month, inflation soared past forecasts on the back of a surge in fuel prices and more expensive clothing, with average price rises jumping from 1.5% to 2.1%, breaching the Bank's 2% target.
It represented an increase on the 1.5% reported by the ONS for April.
"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," Jonathan Gillham, chief economist at PwC, said.
"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."
When the nine-person MPC last met in May the mood was notably more upbeat than was the case at the start of the year, with the bank raising its annual GDP forecast for the UK economy from 5% to 7.5%.
It now estimates that the British economy is now back up to 97.5% of its pre-COVID size. It revised expectations for the level of UK GDP in 2021 Q2 by around 1.5% since the May report, as restrictions on economic activity have eased.
Output in June is expected to be around 2.5% below its pre-COVID 2019 fourth quarter level.
“So far during 2021, the BoE has consistently surprised markets by being slightly more hawkish than expected,” said Kallum Pickering, Berenberg’s senior economist.
“After furnishing marketing expectations during 2020 that it could reduce its main policy rate below zero, the BoE changed its tune by squashing such expectations at its February 2021 meeting. Then in May, the BoE surprised markets by starting an immediate tapering of its asset purchases.”
Watch: Will interest rates stay low forever?
Today also marked the final MPC meeting featuring BoE chief economist Andy Haldane, who is leaving to run the Royal Society of Arts. He is the sole hawk on the MPC and has repeatedly warned that inflation threatens to overheat the UK economy unless the Bank acts to curb price rises.
It comes after a slight shift last week in the US Federal Reserve’s stance on the timeline of a possible rate rise.
The Fed updated its “dot plot”, showing it has pulled forward its first expected post-pandemic rate rise to 2023 as it looks to prevent overheating in the economy.
The dot plot maps out each member’s expectations for rates over coming years. In March this year it showed the median member expecting no rate hikes through that time horizon. The upward revision suggests that the Fed sees a faster-than-expected recovery.
Hinesh Patel, portfolio manager at Quilter Investor, said: “While headlines of economic growth may look great, scratch below surface and it’s right for the Bank to continue in its ‘wait and see’ mode before adjusting policy from here.
"We still need to see the full impact of furlough ending and any structural unemployment that emerges, as well as better understanding transitory vs persistent inflation, before it would be appropriate to act."
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