Bank of England warns of rising inflation, but rates held

LONDON (AP) — The Bank of England kept its main interest rate at the record low of 0.1% on Thursday even though it warned that inflation pressures are rising as the British economy bounces back following the lifting of many coronavirus lockdown restrictions.

In a prepared statement accompanying its decision, the bank's rate-setting Monetary Policy Committee voted unanimously to keep borrowing rates unchanged. The committee also kept its stimulus program unchanged, though one member voted to reduce the scale of support given the improving economic outlook, and rising cost and price pressures.

Both decisions had been widely anticipated in financial markets.

The committee sounded a relatively upbeat tone about the British economy since it last met in early May. It said bank staff have revised their expectations higher for second quarter growth by around 1.5 percentage points since then as restrictions on economic activity have eased. The bank now expects output in June to be only around 2.5% below its level in the fourth quarter of 2019, just before the pandemic struck.

It said the recovery has been most pronounced in the consumer-facing services for which restrictions were loosened in April.

Restrictions across the U.K. have been lifted over recent months following a monthlong winter lockdown and the rapid rollout of vaccines. Much of the British economy, which shrank around 10% in 2020, has reopened though an array of social distancing restrictions remain in place.

However, the most recent planned easing for England that was due to begin this week was delayed by a month because of a resurgence in the virus, this one the more dangerous delta variant. Now, the British government hopes to lift all remaining restrictions on social contact on July 19. The other nations of the U.K. — Scotland, Wales and Northern Ireland — have been broadly coming out of lockdown in the same way as England

The committee said the “direct economic implications of the delay in the final stages of the relaxation of COVID restrictions were likely to be relatively small compared with the impact of the re-openings of retail and hospitality activities that had already occurred.”

The committee also appeared to take a fairly sanguine view on the recent spike in inflation. Like others, the U.K. has seen price pressures increase in recent months as the global economy rebounds.

Inflation in the U.K. rose in the year to May to 2.1%, above the bank's target of 2%. The committee said it could exceed 3% for a temporary period but that the direct impact of rises in commodity prices “will be transitory.”

It said it “does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”