Monetary policy committee predicts inflation will rise from 1.3% this year to 2.7% in 2018 and drops plans for further interest rate cut

The Bank of England has warned households to expect a sharp rise in inflation next year as the weak pound ramps up the costs of imports and squeezes family finances.

Predicting rises in petrol prices and other goods that the UK buys in from abroad, the Bank said inflation would rise from 1.3% this year to 2.7% in 2017 and 2018, higher than in its last set of forecasts three months ago. In its new outlook, the monetary policy committee (MPC), led by the Bank’s governor, Mark Carney, said it would take until 2020 for inflation to get back to the target of 2% set by the government.

The new forecast was delivered as the Bank kept interest rates at a record low of 0.25% and dropped plans to cut them further in the near future, although the inflation warning was tempered with a projection that economic growth will be much stronger than previously forecast in the near-term.

The pound tumbled to 30-year lows in the wake of the vote to leave the EU and has come under fresh pressure in recent weeks over investor fears that the UK is heading for a hard Brexit deal that would leave it shut out of Europe’s single market. The sharp depreciation has made UK exports more competitive but imports more expensive – prompting changes to inflation forecasts.

Carney, who has been forced to fend off criticism that he was overly gloomy on the potential blow to the economy from a leave vote, said on Thursday that sterling’s sharp fall made the Bank’s usual balancing act more challenging.

He described the UK as facing “exceptional circumstances” and said the MPC was making a trade-off between keeping inflation in check and shoring up growth. For now, record-low interest rates and a big programme of electronic money printing, known as quantitative easing, was appropriate, he said.

“The MPC is choosing a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment. However, there are limits to the extent to which above-target inflation can be tolerated,” Carney told a news conference.

His comments about the Bank’s sensitivity to inflation picking up were interpreted by investors as a signal that policymakers were in no hurry to consider cutting interest rates further. Another rate cut would likely put more pressure on the pound and further stoke price pressures in the economy.

The pound, which had received a boost earlier in the day after the high court ruled that parliament should have a say over the triggering of article 50, strengthened further after the Bank’s statement. It rose against the dollar and euro as some economists said that 0.25% now marked the low point for interest rates and that the next move would probably be up.

“If the relatively sanguine view presented in November’s inflation report proves correct, then another interest rate cut now looks unlikely,” said Paul Hollingsworth at the consultancy Capital Economics.

“Given that we think that the economy will surprise the MPC on the upside, and that inflation may be a bit stronger too, we think that the next move in interest rates will be up, and perhaps sooner than most expect.”

Facebook Twitter Pinterest Mark Carney said UK households had appeared to ‘entirely look through Brexit-related uncertainties’. Photograph: Kirsty Wigglesworth/AP

Back in August, when it reduced interest rates from 0.5% to 0.25%, the Bank had indicated it would support another interest rate cut to about 0.1% by the end of this year if the economy followed its predictions for a sharp slowdown. On Thursday it said that guidance had now “expired” and it revised up forecasts for economic growth in the final months of this year and throughout 2017.

That reflected a succession of business surveys and official data signalling that households and companies have largely shrugged off the Brexit vote, for now, although worries about the UK’s longer-term prospects have dented businesses’ investment plans.

Carney commented that households had appeared to “entirely look through Brexit-related uncertainties”.

“For households, the signs of an economic slowdown are notable by their absence. Perceptions of job security remain strong. Wages are growing at around the same modest pace as at the start of the year. Credit is available and competitive. Confidence is solid,” he said.

But looking further ahead to 2018, the Bank said a squeeze on household incomes from higher inflation and uncertainty about the UK’s future trading position would likely curb growth. Taking the near- and long-term forecasts together, the economic picture in three years’ time was slightly worse than in August’s outlook.

Bank of England leaves interest rates unchanged and raises growth and inflation forecasts – business live Read more

The rate decision comes days after Carney was forced to end weeks of speculation about his future as governor by announcing he had agreed to stay on until Brexit negotiations with the EU have ended in 2019.



The move followed criticism from pro-Brexit campaigners and MPs unhappy at what they saw as the overpoliticisation of his role in the run-up to the EU referendum, when Carney warned a leave vote could tip the UK into recession.

On Thursday, Carney said the independent central bank did not feel under any pressure from the government and batted away requests from reporters to further elaborate on his own career plans, saying: “I think we’ve had enough of that saga.”



