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Interest rate hike due in 'coming months,' Bank of England warns
4 November 2021, 12:47
The Bank of England has held off from raising interest rates despite warning over soaring inflation, but said a hike is likely in the "coming months" to cool price rises.
Minutes of the Bank's latest decision showed members of the nine-strong Monetary Policy Committee voted seven to two in favour of keeping rates unchanged at 0.1% - in spite of mounting pressure to rein in rocketing inflation.
Two members were outvoted in calling for a rise to 0.25%.
Financial markets had expected the Bank to raise rates as soon as this month on the back of soaring energy and fuel costs and recent comments from Bank governor Andrew Bailey that policymakers would have to "act" to bring inflation under control.
But the Bank said a rate increase was on the way as it warned gas and electricity tariff increases will see the Consumer Prices Index (CPI) leap from 3.1% to 4.5% by November and hit around 5% next April - its highest inflation forecast for a decade.
The Bank said: "The committee judged that... it would be necessary over coming months to increase Bank rate in order to return CPI inflation substantially to the 2% target."
The minutes showed the Bank held its nerve on rates as most members wanted confirmation first from upcoming official figures that unemployment has not jumped markedly higher following the end of furlough support.
The MPC also chose to hold the Bank's quantitative easing programme at £895 billion, but the vote was split 6-3.
It said most MPC members believed there was "value in waiting for additional information on near-term developments in the labour market... before deciding when a tightening in monetary policy might be warranted".
Policymakers were also concerned over signs the UK economy is flagging as supply chain woes hold back growth, with consumer spending also proving more muted than expected.
The Bank slashed its growth forecast for the third quarter to 1.5% from 2.1% predicted in September. This would mark a steep drop from the 5.5% growth notched up between April and June.
It forecast growth would ease back further to 1% in the fourth quarter, leaving overall gross domestic product (GDP) growth at 7% in 2021 against the 7.25% predicted in August.
The report shows it now expects the UK economy to return to its pre-Covid level by the first quarter of 2022, against a previous prediction for a recovery by the year end.
"Growth is somewhat restrained by disruption in supply chains," the Bank said.
"Alongside the rapid pace at which global demand for goods has risen, this has led to supply bottlenecks in certain sectors.
"There has also been some signs of weaker UK consumption demand."
The Bank said growth was set to be "relatively subdued" from mid-2022 onwards as it downgraded its GDP outlook to 5% in 2022 from 6%, but kept it unchanged at 1.5% for 2023.
While the report showed rate hikes were likely on the way, the Bank's forecasts suggested more muted increases than expected in financial markets.
It predicts that inflation would undershoot its 2% target in three years' time if rates rose to around 1% by the end of 2022, as markets are pencilling in.
The report outlines a gloomy eight months for households from rising prices, but it stuck by its outlook that the inflation spike will remain "transient" and will "fall back materially from the second half of next year".
Supply chain problems that have been impacting a raft of sectors since the early summer are set to last until the end of next year - longer than the Bank first expected.
But that too is set to fade from the end of 2022.