View of the Royal Exchange and the Bank of England in London.

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LONDON – The Bank of England left its monetary policy unchanged on Thursday but warned of a more pronounced phase above inflation target in the near future.

Policy makers unanimously decided to keep the bank’s main lending rate at an all-time low of 0.1%, where it has been since March 2020, and voted 7 to 1 in favor of the quantitative easing program at £ 895 billion ($ 1.25 trillion ).

As expected by economists, the central bank also raised its inflation forecasts after exceeding forecasts for two consecutive months.

“Overall, the bank’s employees now expect inflation to rise significantly in the short term and temporarily reach 4% in the fourth quarter of 2021 and in the first quarter of 2022, 1½ percentage points higher than in the May projection,” the bank said in its monetary policy report.

The Bank’s Monetary Policy Report stated that the temporary spike in CPI (consumer price index) inflation is primarily due to rising energy and other goods prices, which are expected to be moderated over the medium term to bring inflation back towards its 2% target bring.

UK GDP is expected to have increased 5% in the second quarter of 2021, around 4% below pre-pandemic levels and slightly above projections by the BOE in its May report.

The pound sterling rose 0.3% to $ 1.3925 on the news.

“Some modest tightening”

The BOE now expects UK GDP to grow 3% in the third quarter, weaker than forecast in the May report, as a recent spike in Covid-19 cases and hundreds of thousands of workers asked to self-isolate are likely to weigh in .

However, the economy is expected to reach pre-pandemic levels in the final three months of the year, when the effects of the pandemic wear off, before growth slows to more “normal” rates, partly due to the gradual tightening of fiscal policies.

Regarding inflation, the Monetary Policy Committee (MPC) said it would avoid “overburdening capacity pressures that are frictional and likely to be temporary.”

The MPC will look closely at the labor market data, and in particular the unemployment figures, which it sees as “further measures of deflection and underlying wage pressure”.

“The Committee believes that if the economy moves broadly in line with the key projections of the August Monetary Policy Review, a slight tightening of monetary policy over the forecast period is likely to be required to sustain the US inflation target achieve in the medium term, “says the bank’s summary.

Reversal of asset purchases

The MPC said it intended to reduce its inventory of purchased assets if bank interest rates rose to 0.5% in the appropriate economic circumstances by stopping reinvesting in maturing UK government bonds. This is a significantly lower threshold than the key interest rate of 1.5% planned in June 2018.

In its policy report, the MPC predicts that its prime rate would reach 0.5% in the third quarter of 2024, after reaching 0.2% in the third quarter of 2022 and 0.4% in the same period of 2023.

“This implies that the next cycle of monetary tightening will now be much more gradual – and at a lower endpoint – than in the past,” said Vivek Paul, UK chief investment strategist at BlackRock Investment Institute.

“We’re seeing this first rate hike in the first half of 2023 – a bit later than the markets expected – and the new QT (Quantitative Tightening) guidance suggests that asset redemption could begin from 2025.”

Hugh Gimber, global market strategist at JPMorgan Asset Management, said the bank appears to have chosen the latter option given the decision to tighten its expansionary monetary stance “too soon or too late”.