The Bank of England has insisted soaring inflation should be only temporary despite a bigger than expected leap in the cost of living as Britain’s economic recovery gathers speed.
The Bank said it now expects UK growth to surge by 5.5% in the second quarter as it recovers from a lockdown-hit start to the year.
It warned near-term pressure on prices could “prove somewhat larger than expected”, forecasting that inflation will rise above 3%.
But the Bank insisted above-target inflation – which hit 2.1% in May – is set to be only “transitory”.
It came as the Bank’s nine-strong Monetary Policy Committee held interest rates at 0.1% and kept its quantitative easing (QE) programme at £895 billion.
The Bank’s outgoing chief economist Andy Haldane – who leaves at the end of the month – repeated his call for a £50 billion cut to QE after recently warning over the “beast of inflation”, but he was outvoted 8-1.
In the minutes of the decision, the Bank said: “For one member, the rapidly improving economic outlook, and rising cost and price pressures, warranted a reduction in the degree of additional stimulus being provided to the UK economy.”
The Bank’s latest estimate of gross domestic product (GDP) marks a sharp upgrade on the 4.25% second quarter rise it predicted in May.
It added that it expects the one-month delay to the full lifting of lockdown restrictions to have only a “relatively small” economic impact.
The Bank also admitted the recent hike in inflation was also far higher than it had forecast.
In May, the Bank said inflation was not set to break through its 2% target until August.
But it said current increases in growth and inflation would not be maintained.
The Bank said: “The committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back.”
It cautioned over risks to the outlook from rising coronavirus cases or if new Covid-19 variants prove resistant to the vaccine, as well as the end of the furlough support scheme in September.
Despite mounting concerns over rising inflation, the Bank did not signal any shift towards raising rates or trimming its QE programme.
It said: “The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”
The Bank added that most rate-setters felt that “policy should both lean strongly against downside risks to the outlook and ensure that the recovery was not undermined by a premature tightening in monetary conditions”.
But the Bank is coming under increasing pressure, having markedly under-estimated inflation so far in its forecasts and following a more proactive stance by the US Federal Reserve as it too battles rising inflation.
James Smith, an economist at ING, said: “The central bank is caught between higher-than-expected inflation and encouraging activity data, and mounting uncertainty surrounding Covid-19.”
He said rates are still unlikely to rise before 2023.
“While the latest inflation reading was higher than expected, and the Bank now expects inflation to exceed 3% at some point this year, our view and theirs is that price pressures will subside through 2022.
“That in turn reduces the imminent pressure to ease stimulus and we’re currently pencilling in the first move in early 2023.”