The Bank of England says it expects inflation to surge above 3%, but keeps its $1.25 trillion bond-buying target for now

Bank of England
The Bank of England is the UK’s central bank.

The Bank of England said it now expects UK inflation to surge above 3%, but nonetheless maintained its bond-buying target at $1.25 trillion, saying it still believed sharp price rises will be temporary.

Departing chief economist Andy Haldane was the only one of nine monetary policy committee (MPC) members to vote against the plans. Raising concerns that strong inflation may stick around, he voted to cut the bond-buying package by 50 billion pounds ($70 billion).

The Bank also decided to keep its main interest rate at the record-low level of 0.1%, in a unanimous vote, on top of 8-1 decision to keep the bond-buying package steady at 895 billion pounds ($1.25 trillion).

The pound fell after the announcement, and was around 0.25% lower against the dollar at $1.393.

UK inflation jumped 2.1% in May year-on-year, the biggest rise since July 2019 and above the Bank of England 2% target. It was a bigger rise than the central bank had expected.

The Bank said on Thursday that it now expects inflation to jump above 3% for a temporary period, “owing primarily to developments in energy and other commodity prices.” In May, it had only expected inflation to rise temporarily above 2%.

Yet the Bank’s MPC said it expects inflation to fall back again as commodities price rises fade. However, it said there are “risks around this central path, and it is possible that near-term upward pressure on prices could prove somewhat larger than expected.”

Central banks around the world are dealing with stronger inflation than has been seen for decades, as economies rebound sharply from the COVID-19 slump. Too much inflation is seen as disruptive for economies, and central banks try to keep it at around 2%.

In the US, where year-on-year inflation hit 5% in May, the Federal Reserve has signalled a slight shift in its expectations for monetary policy. Officials now predict the central bank will raise rates in 2023, according to “dot plot” estimates released last week.

Paul Dales, chief UK economist at consultancy Capital Economics, said: “Other than the MPC noting the growing upside risks to inflation at today’s policy meeting, there were no real signs that it is thinking about tightening policy sooner, à la the Fed.

“We think policy will be tightened much later than the mid-2022 date the markets have assumed.”

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European Central Bank holds interest rates and bond-buying steady as it weighs up the eurozone’s recovery

Christine Lagarde is the president of the European Central Bank.

The European Central Bank kept interest rates at record-low levels on Thursday and kept its enormous bond-buying program steady as it weighed up the recovery in the eurozone economy.

The ECB’s main deposit rate will stay at -0.5%, while the coronavirus bond-buying package will stay at 1.85 trillion euros ($2.23 trillion), the governing council said in a statement.

At the bank’s last meeting it pledged to step up the pace of bond purchases in response to rising bond yields.

COVID-19 battered the eurozone economy in 2020, and a resurgence of cases has led many countries to reimpose tough restrictions in 2021.

But policymakers and citizens see hope on the horizon. The European Union’s initially slow coronavirus vaccine rollout is picking up pace and the International Monetary Fund has upgraded its growth forecast for the eurozone in 2021 to 4.4%, after the economy shrank 6.6% in 2020.

The European Central Bank’s decision to hold interest rates came as no surprise to analysts.

“Vaccination numbers within the euro area are beginning to pick up pace, providing hope that economies will soon be able to start the reopening process,” Mohammed Kazmi, portfolio manager for Swiss private bank UBP, said.

He added: “We think it makes sense for investors to start preparing and positioning for the June ECB meeting, which will likely be accompanied by significant growth revisions higher and [bond] purchases for Q3 probably moving back towards a more normal pace.”

The euro was around 0.1% higher against the dollar on Thursday at $1.204, while the yield on the key German 10-year government bond had risen 0.9 basis points to -0.250%.

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