Bank of England predicts inflation will spike to 4% by the end of 2021

Bank of England predicts inflation will spike to 4% by the end of 2021

August 5, 2021

Bank of England predicts inflation will spike to 4% by the end of 2021 – way above 2% target – but insists it will only be temporary amid UK’s recovery from coronavirus crisis as interest rate is held at record low of 0.1%

  • Bank of England predicted nation will face higher than expected inflation levels
  • Inflation could hit four per cent by the end of 2021, double two per cent target
  • But Bank insisted spike will only be temporary and should fall in medium term 
  • Meanwhile, Bank said it is holding interest rates at historic low of 0.1 per cent

The Bank of England today predicted inflation will spike to four per cent in the fourth quarter of 2021 – double its target of two per cent. 

The Bank’s Monetary Policy Committee (MPC) said it expects inflation to continue to creep up, with the economy facing a ‘more pronounced period of above-target inflation in the near term’ than previously expected as it recovers from the coronavirus crisis.  

However, the committee said it expects the surge to only be temporary, forecasting a return to target by 2023.   

Meanwhile, the MPC’s eight members voted unanimously in favour of holding interest rates at the historic low of 0.1 per cent. 

The Bank of England today predicted inflation will spike to four per cent in the fourth quarter of 2021 – double its target of two per cent

The Bank’s Monetary Policy Committee said it expects to return to its inflation target of two per cent in 2023

The committee’s latest report said that inflation is likely to rise from the current rate of 2.5 per cent to four per cent by the end of the year.     

The pace of price rises will then dip to 2.5 per cent in the fourth quarter of 2022 and to two per cent in the fourth quarter of 2023.     

The MPC said: ‘Twelve-month CPI inflation rose to 2.5 per cent in June, above the MPC’s two per cent target and 0.8 percentage points higher than expected in the May Report.’

It added: ‘CPI inflation is projected to rise temporarily in the near term, to four per cent in 2021 Q4, owing largely to developments in energy and other goods prices, before falling back to close to the two per cent target.’

The committee said its ‘central expectation’ is that elevated global and domestic cost pressures ‘will prove transitory’ as the world emerges from the pandemic.  

‘Nonetheless, the economy is projected to experience a more pronounced period of above-target inflation in the near term than expected in the May Report,’ it said. 

The committee said that in the medium term ‘inflation is projected to fall back to close to the two per cent target, and demand and supply are expected to return broadly to balance’.

Andrew Bailey, the Governor of the Bank of England, signalled in July that the Bank is ready to raise interest rates to curb inflation should the expected retreat fail to materialise.

Andrew Bailey, the Governor of the Bank of England, said in July that he is prepared to raise interest rates to curb inflation should higher levels not retreat 

He said the Bank will be vigilant to any signs that the increase is not temporary and that ‘if we see those signs, we are prepared to respond with the tools of monetary policy’. 

Meanwhile, the Bank today kept its economic growth forecast at 7.25 per cent for 2021, as it said gross domestic product (GDP) was set to have risen by a better-than-expected five per cent in the second quarter, but will slow to around three per cent – weaker than first forecast – in the third quarter.

The 2021 prediction would still mark the fastest growth since the Second World War.

Its latest set of quarterly forecasts shows it expects the economy to then grow by six per cent in 2022 and by 1.5 per cent in 2023, compared to previous forecasts of 5.75 per cent and 1.25 per cent respectively.

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