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Inflation Forecast 2.7%: Bank Hints at Rate Rise

The Bank of England monetary Policy Committee, voted 7-1 to maintain the bank rate at the record low level of 0.25% for the 10th month in a row

Emma Wall 11 May, 2017 | 2:23PM
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The Bank of England monetary Policy Committee, governed by Mark Carney, voted 7-1 to maintain the bank rate at the record low level of 0.25% for the 10th month in a row.

Inflation forecasts have been increased to 2.7% for the second half of 2017

But savers were offered some hope of respite as the Bank also warned that rates may have to rise sooner and faster than the market currently expects if wage inflation starts to pick up.

“As the Committee has previously noted, there are limits to the extent to which above-target inflation can be tolerated,” the Monetary policy summary reads. “The continuing suitability of the current policy stance depends on the trade-off between above-target inflation and slack in the economy, as well as the prospects for inflation to return sustainably to target. 

“The Committee judges that, if the economy follows a path broadly consistent with the May central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections.”

The warning tone is in line with inflation forecasts which have been increased to 2.7% in the second quarter of 2017 and then to 2.6% in the second quarter of next year. The Bank’s inflation target is 2%. Most recent inflation figures for April show inflation is running at 2.3%.

Tom Stevenson, investment director for Personal Investing at Fidelity International said that the interest rate announcement held no surprises, but said he expected the Bank to be watching Brexit negotiations closely to inform future decisions.

“The weak pound since Britain’s vote to leave the EU has seen inflation surge in recent months with a weaker sterling pushing up the price of imported goods. For now, it seems the Bank of England will be sitting tight on a rate rise given the headwinds the UK economy faces and the strengthening of the pound,” he said. “Carney remains of the view that the Brexit negotiating period will be extremely challenging for the UK economy. But today’s announcement introduces a more hawkish tone than we have seen previously.”

Kate Smith, Head of Pensions at Aegon warned that investors should prepare their retirement savings from the coming higher level of inflation.

“Inflation can hit people on fixed incomes hard, particularly pensioners. As people are living 20 or more years in retirement they need to think seriously about how they can protect themselves from the ravages of higher inflation eating away at their income and savings,” she said. “Planning ahead and investing to outstrip the destructive effects of inflation could help maintain purchasing power. Getting professional advice could make all the difference.”

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About Author

Emma Wall  is former Senior International Editor for Morningstar