Bank Of England Sees Inflation Surging But Keeps Stimulus

The Bank of England predicted the UK annual inflation rate to continue surging this year as pandemic-hit economies reopen, but kept its record-low interest rate and emergency stimulus intact.

The BoE warned, however, that some "modest tightening" of its monetary policy could be necessary in the future as it forecast inflation soaring to four percent in the final quarter from a near three-year high of 2.5 percent in June.

Its latest forecast, double its 2.0-percent target, adds to fears that a spike in prices worldwide will force central banks to hike interest rates sooner than expected, in turn hindering the economic recovery.

Following this week's regular meeting, the BoE left its interest rate at an all-time UK low of 0.1 percent.

Steered by governor Andrew Bailey, the bank decided also against tapering its cash stimulus pumping around the UK economy that totals close to 1.0 trillion pounds ($1.4 trillion, 1.2 trillion euros).

"We're not complacent" on inflation, Bailey insisted during an online press conference.

The pound and London's FTSE 100 stocks index were little changed in afternoon deals following the central bank's update.

The BoE said in a statement that "inflation is projected to rise temporarily in the near term, to four percent... owing largely to developments in energy and other goods prices".

It then expects the inflation rate to fall close to its target.

The Federal Reserve and European Central Bank have also insisted that high inflation will be temporary, resulting in the pair so far making no changes to their own ultra-low rates and economic support measures.

In the UK, the government led by Prime Minister Boris Johnson has scrapped most lockdown restrictions, enabling its economy to press on with recovery despite worries over the fast-spreading Delta variant of the coronavirus.

The BoE on Thursday maintained its forecast for the UK economy to rebound 7.5 percent this year, returning to its pre-pandemic level.

As the pandemic erupted in March 2020, the BoE slashed its key interest rate to the current record-low level.

It also began pumping massive sums of new cash into the economy.

The bank has created ?450 billion under its quantitative easing (QE) programme since March last year, when Covid-19 prompted Britain's first coronavirus lockdown.

Prior to this it had pumped hundreds of billions of pounds worth of QE into the UK economy over a decade following the 2008-09 global financial crisis and Brexit.

The central bank's total emergency stimulus package stands at ?895 billion.

The BoE is also watching closely British unemployment data as the UK government next month ends its furlough scheme that has kept millions of Britons in private-sector jobs during the pandemic.

"A raft of uncertainties... as well as the impact of the impending withdrawal of government support schemes, saw the Bank of England keeping its policy stance unchanged, while amending its short term outlook for inflation considerably," noted Yael Selfin, chief economist at KPMG UK.