NEW YORK (CNBC) — The Bank of England left its monetary policy unchanged, but warned of a more pronounced period of above-target inflation in the near term.
Policymakers unanimously decided to keep the Bank’s main lending rate at a historic low of 0.1%, where it has been since March 2020, and voted 7-1 to maintain the quantitative easing program at £895 billion ($1.25 trillion).
The central bank also raised its inflation forecasts, as expected by economists, following two consecutive months of above-forecast readings.
“Overall, Bank staff now expect inflation to rise materially further in the near term, temporarily reaching 4% in 2021 Q4 and 2022 Q1, 1½ percentage points higher than in the May projection,” the bank said in its monetary policy report.
The Bank’s Monetary Policy Report said the temporary rise in the consumer price index is primarily due to rising energy and other goods prices, which are set to moderate in the medium term to bring inflation back toward its 2% target.
U.K. GDP is expected to have risen by 5% in the second quarter of 2021, leaving it around 4% below pre-pandemic levels and slightly above the BOE’s projections in its May report.
Sterling edged 0.2% higher to hover just above $1.39 on Thursday afternoon.
Bank of England Governor Andrew Bailey told CNBC on Thursday that while the growth figures suggest the economy is recovering, this needed to be put into context.
“As of now, the level of economic activity is still about 4% lower than it was at the end of 2019, pre-Covid. In any normal state of the world, that is a big number,” he told CNBC’s Joumanna Bercetche.
“It is only not a big number in the sense that we have had such huge gyrations in the economy over the last 18 months. We still have 4% to catch up and even then, of course, we have had no growth over nearly two years.”
Notably, the U.K.’s unemployment rate has declined over the last two quarters to 4.8% in the three months to May, though it remains around one percentage point higher than its pre-Covid rate. The Bank now expects the rate to decline consistently, having peaked at a much lower level than previously anticipated.