Image source, Reuters

Although the Bank of England indicated that it would raise interest rates over “coming months”, in response to rising inflation, they resisted an immediate increase.

Bank policymakers voted 7-2 on Thursday in favor of maintaining the 0.1% record-low rate.

Andrew Bailey, governor of the Bank, stated that it was an “close call”

Monetary Policy Committee (MPC), stated that there was value in waiting to observe how the market responds to the termination of furloughs.

The meeting did not exclude a rate increase at the December next meeting.

Each six-weekly meeting of the MPC is held. MPC member Mr Bailey replied, “From now onwards,” when asked about a possible rate increase.

According to him, the MPC spent many hours deliberating on its decision. He added that “the calls are close and they are difficult.” It is an indication of our current position.

Although the MPC voted to maintain interest rates at current levels, the policymakers weren’t unanimous in their decision.

Dave Ramsden (two of nine) and Michael Saunders (one each) voted for a rate increase to 0.2% immediately.

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The coronavirus pandemic caused rates to drop to current levels. Rates were reduced to March 2013 to reflect this.

However, the Bank has been expected to increase its borrowing costs due to the opening of the economy.

After the Bank’s decision the Pound fell nearly 1% to $1.3556, reflecting investors who had been betting on an increase in the rate.

According to the financial markets, the interest rate will reach 1% before the year ends.

The global economic recovery has seen gas and electricity prices rise.

Factories and businesses also face staff shortages. They also have a backlog, which is pushing up the prices.

The Bank anticipates that inflation will reach 5% by April next year, an increase of 3.1% from September.

This rate would surpass 2%, the Bank’s goal of 2%.

According to The Bank, household energy costs will be “substantially” more expensive in the coming year.

The policymakers said that food prices would likely rise during the Christmas season.

They added, however that inflation would be temporary and prices will fall to 2% by the end of the year.

Inflation will continue to increase in the coming two years, which is likely to cause financial pressure for households.

In its latest Monetary Policy Report the Bank expects that price increases will outpace wage growths in 2022 and 2023.

In 2024, real incomes will not grow at all.

Banks of the high street use the Bank’s MPC rate for their savings and mortgage rates to decide on their mortgages.

Although an increase in interest rates is bad news for mortgage borrowers, it would not have meant that many homeowners would be subject to an immediate rise in their payments.

35% of homeowners currently own a fixed rate mortgage.

The near-term impact of higher prices on economic growth is expected to be significant.

According to the Bank, the economy will grow 1.5% over the next three months.

This rate is close to half what was expected in its August forecast.

The economy will not recover to pre-pandemic levels until next year. It was previously forecast that the economy will recover before the year 2021.

Also, the Bank has reduced its projection for 2021-2022 annual growth to 7% and5% respectively from 7.25% & 6%.

People and businesses need to be aware that rates will rise in the months ahead, possibly as much as 1% from record lows at 0.1%. But not exactly this month.

According to the Bank of England, the economic crisis has caused supply chain disruptions for both goods and workers. This is putting off the return of the pandemic-like growth that was promised. Even though inflation is at an all-time high, forecasting a peak of 5.5% as the energy price cap rises in April 2022; the Bank cannot do much about global causes.

The Bank should take action if there is a continuation of inflation through 2023 or 2024. The Bank believes that rising inflation risks will continue to increase. The Bank predicts that inflation will remain at 3% in 2024 if interest rates are kept at the emergency levels.

Acting now, however, would require immediate proof of an increase in the number of wage increases across the country. In the balance, members of Bank of England’s Monetary Policy Committee would like to have official data within a week on the effects of ending the furlough on the employment market.


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