Bank of England shrugs off inflation fears

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The Bank of England has shrugged off concerns that inflation could surge as the economy returns to normal after the pandemic.

Consumer price inflation hit a two-year high of 2.1% in the year to May, exceeding the Bank’s 2% target.

But in its latest statement, the Bank’s Monetary Policy Committee (MPC) said the effect would be temporary.

The MPC voted 9-0 to keep interest rates steady at the historic low of 0.1%.

Rates have been unchanged since March last year, when they were reduced to help contain the economic shock of Covid-19.

MPC members also voted 8-1 to continue with the Bank’s existing asset purchase scheme, maintaining its government bond-buying target at £875bn.

“Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory,” the Bank said.

The Bank also indicated that it had raised its expectations for UK economic growth because of a recovery in activity.

It said output in June was now expected to be about 2.5% below its pre-Covid level.

“Output in a number of sectors is now around pre-Covid levels, although it remains materially below in others. The housing market remains strong, and indicators of consumer confidence have increased,” it said

The MPC said the direct economic implications of delaying the final relaxation of Covid restrictions to 19 July was likely to be “relatively small” compared with the impact of previous stages.

“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,” it added.

“There are two-sided risks around this central path, and it is possible that near-term upward pressure on prices could prove somewhat larger than expected.

“Taking together the evidence from financial market measures and surveys of households, businesses and professional forecasters, the Committee judges that UK inflation expectations remain well anchored.”

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