Inflation shock: Experts warn could hit 5% as central bank holds back from hiking interest rates

The Bank of England has voted to hold interest rates at their record low but raised fresh concerns over rising levels of inflation which some experts now believe could hit 5 per cent.

The Bank of England's monetary policy committee of nine members voted unanimously in favour of holding rates at 0.1 per cent. Picture: Getty Images

The central bank’s monetary policy committee (MPC) of nine members voted unanimously in favour of holding rates at 0.1 per cent.

The bank will also keep up its £895 billion quantitative easing programme following a seven to two vote in favour.

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Committee members Michael Saunders and Dave Ramsden voted against, calling for a cut to £860m.

The MPC said developments over the past month have "strengthened" the case made in August that some tightening of monetary policy could be necessary to meet the central bank's 2 per cent inflation target sustainably in the medium term.

However, in the latest report, the MPC added that "considerable uncertainties remain". It stressed that it will monitor developments in the labour market, including the impact of cost increases on business and employees.

The bank also said that inflation is expected to rise in the short term, projecting it will move "slightly above 4 per cent" in the fourth quarter of 2021. It said this will be largely due to developments in energy and goods prices.

Rachel Winter, associate investment director at Killik & Co, noted: “Inflation appears to be showing no signs of abating as the UK continues to experience record highs, with some experts predicting that inflation will reach around 4 per cent by the end of the year.

“The central bank has repeatedly said it believes this higher inflation to be ‘transitory’, but the UK is currently experiencing supply chain issues which are likely to cause higher inflation in the short term.”

Kevin Brown, savings specialist at Scottish Friendly, warned that inflation could peak at even higher levels.

“The Bank of England’s latest rate announcement is littered with caveats and what ifs,” he said. “It appears to fail to account for the real situation on the ground, where people are experiencing rocketing prices on a range of core needs.

“The price of gas, for instance, has soared in recent weeks, to the point where it is collapsing energy firms.

“Reading between the lines, what is really raised here is the prospect of stagflation – a toxic economic condition for the country to be in where inflation rockets thanks to supply constraints but economic activity collapses nonetheless.

“With prices soaring – we think nearer 5 per cent, rather than the BoE’s 4 per cent prediction – people are going to largely batten down the spending hatches and this is going to kill off the recovery in its relative infancy.”

Tom Kremer, senior macro strategist at Quintet Private Bank, the parent company of Brown Shipley, said: “Economic developments since last month’s policy meeting have been mixed, with growth momentum moderating somewhat as retail demand is starting to fade after an initial reopening-led bounce, though employment has fared better than expected.

“The overhang created by the expiry of the furlough scheme at the end of September, creates some uncertainty however. Consequently, we are not surprised by the Bank of England’s unchanged policy mix.”

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