Interbank Market News Scan: Bank of England raises its policy rate to 0.5%, sees inflation at 7%.

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“The UK economy continues to recover. In November last year, economic activity was back to where it was before the pandemic. Since then, the spread of Omicron meant people spent less. But as the number of new cases falls, we expect spending to go up again.

The number of people out of work is going down. The unemployment rate is only slightly higher than it was before the start of the pandemic.

Inflation (the pace of price rises) has risen above our 2% target. Prices rose by 5.4% last year.

Higher energy prices is one of the main reasons for this. Large increases in oil and gas prices have pushed up petrol prices and utility bills.

Higher prices for goods that we buy from abroad have also played a big role. As economies reopened around the world, people started to buy more goods. Some businesses struggled to meet this extra demand, held back by, for example, shortages of materials and workers. That pushed up their costs and led to higher prices for consumers.

These effects are likely to continue pushing inflation up in the coming months. We expect inflation to rise to around 7% in the spring.

We expect inflation to fall back from the middle of this year. We don’t expect that energy prices will continue to rise as fast, and the shortages that are currently making it difficult for businesses to make their products should ease. We expect inflation to be close to our target in around two years’ time.

We have raised the official interest rate we set, known as Bank Rate, to 0.5% to support inflation returning to our 2% target.  We may need to raise interest rates somewhat further.  Our job is to ensure that inflation returns to our target in a sustainable way.”

Source: Bank of England

3 February 2022

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