London November 4 2021: The Bank of England has voted to keep interest rates at their record low level of 0.1%, spurning calls for an increase to tackle surging inflation.
The Monetary Policy Committee (MPC) voted 7-2 in favour of no change.
Rates were cut to their current level in March last year in response to the effects of the coronavirus pandemic.
But the reopening of the economy has fuelled price rises, prompting expectations that the Bank would increase borrowing costs.
The Bank has signalled it will raise interest rates in “coming months” as it warned of a two-year cost-of-living squeeze for households.
Investors were betting on an immediate rate rise. But policymakers stopped short of this, saying there was “value” in waiting to see how the jobs market coped with the end of the furlough scheme.
The pound fell by nearly 1% against the dollar to $1.3556 following the Bank’s decision.
Financial markets expect rates to hit 1% by the end of next year.
A L S O || R E A D
Fed unveils bond-buying ‘taper,’ holds to ‘transitory’ inflation belief
How much further could prices rise?
Electricity and gas prices have surged as the global economy reopens.
Factories and businesses are also struggling with staff shortages and a backlog of orders, which has also pushed up prices.
The Bank expects inflation to peak at 5% next April, up from 3.1% in September.
This would be the highest rate in more than a decade and far higher than the Bank’s target of 2%.
The Bank said households faced “substantially” higher energy bills next year.
Policymakers also said food prices were likely to rise in the run-up to Christmas.
However, they added that the sharp increase in inflation was expected to be “temporary”, with price rises expected to ease back towards 2% in the second half of next year.
A L S O || R E A D
Russia to Slap Quotas on Fertilizer Exports to Safeguard Supply
What does this mean for households?
Higher inflation is expected to put pressure on household finances for the next two years.
The Bank’s latest Monetary Policy Report expects price rises to outpace pay increases in 2022 and 2023.
So-called real incomes are expected to barely grow in 2024.
High Street banks use the interest rate set by the Bank’s MPC to set their own mortgages and savings rates.
While an increase in interest rates would have been bad news for borrowers, many mortgage holders would not have faced an immediate increase in payments.
Three quarters of mortgage holders are currently on fixed-rate deals.
A L S O || R E A D
European Coal Prices Gains the Most Since 2020 on China Demand
What about the economy?
Higher prices are expected to weigh on growth in the near term.
The Bank now expects the economy to grow by 1.5% in the three months to September.
This is almost half the rate expected at its previous forecast in August.
As a result, the economy is not expected to get back to its pre-pandemic size until the start of next year. It had previously expected the economy to recover by the end of 2021.
The Bank also cut its forecast for annual growth in 2021 and 2022 to 7% and 5% respectively, down from 7.25% and 6% previously.
