The Bank of England’s Monetary Policy Committee (MPC) has held interest rates at 0.1%, and stuck to its £895bn asset purchase target, despite inflation fears.
Members of the MPC voted unanimously in favour of holding rates.
However, forecasts for economic growth in the third quarter were revised down by 1% due to supply constraints hitting economic recovery and signs that cost pressures may remain persistent.
The Bank of England said that developments over the past month have strengthened the case that some tightening of monetary policy may be needed to meet the bank’s 2% inflation target.
According to the Bank, UK inflation may reach above 4% by the end of the year.
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Hinesh Patel, portfolio manager at Quilter Investors, said the latest monetary policy decision indicates that inflation may go higher than previously expected.
He said: “The Bank of England, in its policy decision today, clearly expects the inflation rate to be higher than previously feared. While they reiterate it will be transitory, it will no doubt be of major concern. Ultimately what is flowing through the system right now is “bad inflation”, that is price rises are hitting the most vulnerable households, alongside the impacts of furlough on unemployment uncertainty. This uncertainty is likely to continue with the end of the furlough scheme coinciding with the structural shift in skillsets in the employment market.
“None of these can be solved by monetary policy and as such the BoE should be well within its rights to start tightening its stimulus policy. Unfortunately if it does not it risks doing even more damage on the social divide through ever increasing wealth inequality.”
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