The Bank of England (BOE) has made known that it is holding out on increasing interest rates amid rising inflation across the United Kingdom.

In pushing back against speculation that a surge in inflation means that it is preparing to boost interest rates, the UK’s Central Bank has declared that the economy still needs support to recover from the pandemic. To this end, the BOE is warning against “premature tightening,” taking a hard line approach in its communication on the need to maintain stimulus.

The BOE’s position comes amid the sharp increase in its outlook for inflation, which it now estimates will peak at three per cent, which is a half-point higher than its initial forecast just six weeks ago. In addition, there has been heightened anxiety among investors and economists that consumer price increases may prove sticky.

Inflation leapt above the BOE’s two per cent target unexpectedly for the first time in almost two years last month, fanning speculation about when policymakers will have to ease off on stimulus. A growing minority of economists is now anticipating an interest rate increase sometime next year.

BOE officials voted unanimously to keep benchmark rate stable

However, officials at the BOE led by Governor Andrew Bailey have voted unanimously to keep the benchmark lending rate at 0.1 per cent and by 8-1 to maintain the pace of its bond purchases, targeting a cumulative 895 billion pounds ($1.2 trillion) by the end of this year. Chief Economist, Andy Haldane, who steps down from the nine-member BOE’s Monetary Policy Committee this month, was reported by Bloomberg to have pressed for a reduction in the stimulus.

The rest of the committee said the economy still has plenty of slack built up during lockdowns that forced thousands of businesses to close during the pandemic. The BOE reiterated that it does not intend to tighten policy until there is clear evidence that inflation will stay above target for a sustained period.

In a statement today, the BOE commented that, “spare capacity in the economy was expected to be eliminated as activity picked up, and there was expected to be a temporary period of excess demand…. As these transitory effects faded, conditioned on the market path for interest rates, inflation was expected to return to around two per cent in the medium term.”

UK Chief Investment Strategist at BlackRock Investment Institute, Vivek Paul commented that “the BOE’s interest rate decision reinforces his belief that the committee will continue providing monetary support through the economic restart.” Money-market bets on the BOE raising interest rates were also pushed back by two months to August 2022.

Major focus for policymakers and BOE and British Treasury

Some economists who expect rates to rise next year said the bank may have to change their tone in the months ahead despite the relatively relaxed outlook delivered today.

For now, the policy makers both at the BOE and the British Treasury have been focused on supporting millions of workers either unemployed or on furlough after coronavirus restrictions forced thousands of businesses to close.

The BOE expects unemployment to touch 5.4 per cent in the third quarter before falling back below the current level near five per cent next year. Bank staff revised up their expectations for gross domestic product growth to 5.5 per cent in the second quarter from the 4.25 per cent rate they estimated in May.

Policy makers are due to revise inflation forecasts in August. Their latest outlook published last month suggested a sharp recovery in the second half of the year, leading to inflation peaking around 2.5 per cent at the end of this year.