BoE warns of sharp rise in prices as rates kept on hold

The Bank of England is forecasting a sharp rise in inflation following the slump in sterling. Picture: Anthony Devlin/PA Wire

The Bank of England is forecasting a sharp rise in inflation following the slump in sterling. Picture: Anthony Devlin/PA Wire

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The Bank of England has kept interest rates on hold and raised its economic outlook for this year and next, but warned that tough times were still ahead with lagging growth and a jump in inflation set for 2018.

Minutes for the latest monetary policy committee (MPC) meeting showed members voted unanimously to keep rates at 0.25 per cent, having been slashed from 0.5 per cent to a fresh record low in August as part of a post-referendum stimulus package worth £170 billion.

In its latest quarterly inflation report, the Bank raised its forecast for gross domestic product (GDP) growth over the next two years, revised up from 2 per cent to 2.2 per cent for this year and from 0.8 per cent to 1.4 per cent for 2017.

It follows better-than-expected growth of 0.5 per cent in the third quarter, with the Bank also now pencilling in fairly steady expansion of 0.4 per cent in the final three months of 2016.

But the Bank slashed its forecast for growth in 2018 to 1.5 per cent, from 1.8 per cent previously, and gave a gloomy outlook for households, with higher unemployment and soaring consumer prices index (CPI) inflation set to their spending power.

It said: “Largely as a result of the depreciation of sterling, CPI inflation is expected to be higher throughout the three-year forecast period than in the committee’s August projections.

“In the central projection, inflation rises from its current level of 1 per cent to around 2.75 per cent in 2018, before falling back gradually over 2019 to reach 2.5 per cent in three years’ time. Inflation is judged likely to return to close to the target over the following year.”

Calum Bennie of Scottish Friendly said: “The outlook isn’t good for cash savers in particular as interest rates seem set to remain in the doldrums for the foreseeable future and inflation looks likely to rise in early 2017. Put simply we will have to work harder than ever to get a return on our money.

“Now attention will turn to the Chancellor’s Autumn Statement [on 23 November] both to gauge the new administration’s approach to the looming post-Brexit Britain and how savers, investors and pension holders are likely to be impacted by any new announcements.”

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