On Thursday, the Bank of England announced that monetary policy would remain unchanged and lowered its forecast for economic growth in the third quarter of this year. BoE officials unanimously voted to keep the main interest rate at an all-time low of 0.1 per cent and to maintain its target of 875 billion pounds ($1.2 trillion) in asset purchases.
But the case for tightening seems to have taken a turn for the worse, as Dave Ramsden, deputy governor of the Bank of England, voted in favour of an early end to the bank's purchases of gilts.
The bank cut its third-quarter GDP growth forecast to 2.1 per cent from 2.9 per cent in August. The downgrade partly reflects "some supply constraints in production". According to the latest forecasts, GDP in the UK in the third quarter will be about 2.5 per cent lower than its pre-epidemic peak of COVID-19.
The move follows an unexpected slowdown in UK economic growth in July, but the consumer price index (CPI) posted its biggest monthly increase since records began in January 1997. The inflation data prompted some Bank of England observers to advance their expectations of raising interest rates to early next year, Bank of America Corporation.Analysts believe the Bank of England could raise interest rates as early as February if inflationary pressures persist.
Economic recovery is "steady"
The UK economy grew by only 0.1 per cent month-on-month in July, according to the Office for National Statistics. This was the sixth consecutive month of growth after the lifting of epidemic prevention restrictions, but the increase was significantly lower than expected and well below the 1 per cent increase the previous month. The ONS said the UK economy was still 2.1 per cent below its pre-COVID-19 level.
The figures prompted Bank of England Governor Pele to suggest that the UK economy's recovery from the COVID-19 epidemic was "leveling off". In a speech to members of Parliament earlier this month, Bailey reiterated his view that the recent jump in inflation would not last. The Bank of England warned in August that inflation could reach 4 per cent this year, double the target, but then fall back to close to 2 per cent.
Figures compiled last week by the Office for National Statistics showed that CPI in the UK rose 3.2 per cent year-on-year in the year to August, with a media survey forecasting 2.9 per cent and CPI rising 2.0 per cent in July.