The Bank of England voted across the board to keep borrowing rates the same
The Bank of England held its main interest rate at 0.1% on Thursday, a record low, despite the central bank warning of inflation pressures as the UK economy continues its recovery.
Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown, commented on the bank’s decision:
“The Bank of England isn’t ripping up the party rule book yet, content to let the economy feast on record-low rates and ultra-loose monetary policy. It is on alert, ready to change the game if the inflationary guest starts acting up, but right now it’s not changing the mood music,” said Streeter.
The monetary policy committee retained an upbeat outlook around the UK economy. As restrictions on economic activity have eased, the Bank of England has revised its Q2 estimate for growth by 1.5%. The central bank expects output for this month to be a mere 2.5% below its level in Q4 of 2019, just prior to the beginning of the pandemic.
“The UK economy is still dancing to the tune of consumer confidence, helped by a bouncy castle of a housing market and the jump in activity since the re-opening of shops, pubs and restaurants in April hasn’t lost much energy. Current economic activity is even stronger than in May, with supply bottlenecks pushing up prices at a time of strong demand for goods,” Streeter added.
While the recovery continues, inflation is expected to blow past the BoE’s target, exceeding 3%. However, it is then expected to retreat, “with the balloon of higher prices losing air”, said Streeter.
“Already there are party pooper signs. Companies are having to reduce services, due to the lack of staff. The Bank of England identifies that there are now recruitment difficulties across sectors and regions, and this could be a drag on growth,” Streeter said.
“The Bank of England knows that the sugar rush of cheap money needs to be withdrawn. But right now it’s judging that the guests at the party aren’t yet robust enough to cope with their treats being taken away.”
A significant portion of the UK economy, which shrank by 10% during 2020, is now open although social distancing requirements are still being enforced.