BoE sees inflation breaking 3% but won’t rush to unwind stimulus

The Bank of England said inflation would peak above 3% as Britain’s locked-down economy reopens, but the rise further beyond its 2% target would only be “temporary” and most policymakers favoured keeping stimulus at full throttle.

Sterling fell as the BoE’s nine monetary policymakers voted 8-1 once again to keep their government bond-buying programme at 875 billion pounds ($1.22 trillion).

Some investors had bet that more objectors would appear, signalling the central bank was speeding up its thinking about unwinding the huge stimulus that has helped steer the world’s fifth-biggest economy through the COVID-19 crisis.

But only Chief Economist Andy Haldane, who leaves the BoE later this month, voted to scale back the bond-buying plan by 50 billion pounds, the second meeting in a row he has cast the lone dissenting vote.

Most members of the Monetary Policy Committee felt they should “lean strongly against downside risks to the outlook and ensure that the recovery was not undermined by a premature tightening in monetary conditions,” the BoE said.

Economists taking part in a Reuters poll had expected no policy changes by the BoE as it waits to see if the post-lockdown jump in inflation proves transitory and whether unemployment rises when the government scales back its job-protection scheme.

Last week, the U.S. Federal Reserve began to move towards reducing its pandemic stimulus by signalling its first rate hike in 2023, a year earlier than previous projections, putting the focus on what other central banks might do next.

The MPC voted 9-0 to keep both Bank Rate and the BoE’s 20 billion-pound corporate bond programme unchanged.

British consumer price inflation jumped to 2.1% in May, a long way below the U.S. rate of 5% but surpassing the BoE’s 2% target level sooner than the central bank had forecast.

Last month, the BoE had projected CPI would hit 2.5% in late 2021 before easing back to 2%. Its new forecast brought the central bank into line with recent forecasts by several private economists.

“Building global input cost pressures had increasingly been passed through into manufacturing output prices and non-oil import prices,” the BoE said in minutes of its meeting.

“CPI inflation was expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and was likely to exceed 3% for a temporary period, peaking higher than previously thought.”

The MPC would look at “medium-term inflation expectations, rather than factors that are likely to be transient,” it said.

The BoE also said its staff had revised up their estimate for the level of GDP in the second quarter of 2021 by 1.5 percentage points since the last set of forecasts in early May.

Output in June is now forecast to be around 2.5% below its level at the end of 2019, before the pandemic.

But the central bank said policymakers were split on whether this faster-than-expected catch-up meant growth would be any faster over the medium term.