BoE holds bank rate but predicts 2% inflation in six months

Posted on 21 December, 2016

The Bank of England’s Monetary Policy Committee has voted unanimously to maintain Bank Rate at 0.25%. However the MPC now expects inflation to rise to the 2% target within six months – quicker than expected – after rising to 1.2% in November. Industry experts now believe that racing inflation figures will put pressure on the Bank of England to raise rates sooner.

In the November Inflation Report, the Committee said that output was expected to grow at a moderate pace in the near term, but slow from the beginning of next year, reflecting the likelihood that household real income growth would slow and hence weaken household spending.

It also reflected uncertainty over future trading arrangements, and the risk that UK-based firms’ access to EU markets could be materially reduced, which could restrain business activity and supply growth.

CPI inflation was expected to rise to around 2.75% in 2018, before falling back gradually over 2019 to reach 2.5% in three years’ time. Inflation was judged likely to return to close to the target over the following year. However since November, long-term interest rates have risen internationally, including in the United Kingdom. In part, the MPC says this reflects expectations of looser fiscal policy in the United States which, if it materialises, will help to underpin the slightly greater momentum in the global economy evident in a range of data since the summer. At the same time, however, the Bank believes global outlook has become more fragile, with risks in China, the euro area and some emerging markets, and an increase in policy uncertainty. 

Nick Dixon, Investment Director at Aegon, commented: “With inflation moving towards the Bank’s 2% target quicker than expected, the only way is up for interest rates in 2017. Base rate hikes will be the tool of choice for the monetary policy committee to keep prices in check.  Mortgage holders should consult their advisers now about fixing their rates before they rise”

Dominic Baliszewski, Director of Consumer Strategy for Momentum UK, added: “There might be something for savers to celebrate in the New Year after all. Low interest rates are reaching the end of the road, as this week’s racing inflation figures will likely put pressure on the Bank of England to raise rates sooner, rather than later.”