The Bank of England has sought to calm fears about inflation, which is expected to exceed 3 per cent in coming months, saying the surge in prices was “transitory” and should not affect monetary policy.
The central bank’s message came after data last week showed inflation rising much faster than it had previously forecast as the economy rebounded more strongly than expected.
The BoE’s Monetary Policy Committee signalled that it would wait for inflation to subside rather than take action as it stuck with its exceptionally loose policy approach.
“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 its latest meeting.
It said that inflation would rise further from the 2.1 per cent recorded in May and was “likely to exceed 3 per cent for a temporary period”.
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 programme of asset purchases until the end of the year, which is set to raise the total amount of quantitative easing to £895bn.
In the minutes of the meeting, there were signs that more than one MPC member was beginning to feel uncomfortable with the committee’s exceptionally stimulative stance towards monetary policy.
In the committee’s discussion about when rate setters would know whether there was more sustained inflationary pressure than they thought there was at present, the minutes said “on one view, forthcoming data had the potential to provide an early indication of sustained economy-wide inflationary pressures”.
This was a signal that some members of the MPC might be ready to vote for higher interest rates or ceasing QE in the next few months, although the minutes gave no indication of how widely shared that view was on the committee.
“There weren’t any of the hawkish surprises that the Fed sprung last week,” said Paul Dales, UK economist at Capital Economics.
The other view on the MPC was that the members needed “a somewhat longer period of time” and at least until the coronavirus furlough scheme finishes at the end of September before taking any judgment on the strength of the recovery and the rise in inflation. There was no indication of how many members supported that view.
The members who held that view highlighted the importance of monitoring “closely movements in measures of medium-term inflation expectations”, which the MPC thought were “well anchored” at the 2 per cent inflation target, according to the minutes.
Samuel Tombs, UK economist at Pantheon Macroeconomics, said: “The vast majority of current MPC members continue to expect the upcoming bout of above-target consumer price inflation to be fleeting, despite recent upside surprises to gross domestic product, employment and inflation.”
UK government bond prices rallied and sterling fell in early afternoon trading after the central bank’s policy decision. The UK currency was down 0.3 per cent against the US dollar at $1.3922 and off 0.4 per cent against the euro at €1.1662. The 10-year gilt yield fell 0.03 percentage points to 0.75 per cent.
In his last meeting before leaving 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.