Barret Kupelian, senior economist at PwC UK, says
“Today the Bank of England’s Monetary Policy Committee (MPC) announced its decision to increase the Bank Rate to 0.5% and to start to reduce its existing programme of asset purchase programme unchanged.
“In its latest projections, the MPC expects inflation to peak at 7.1% in the second quarter of this year. This is the highest quarterly rate recorded in its post-independence history and the highest rate since the ERM crisis in the early 1990s. [see chart]
“The Bank’s forecasts highlight that high inflation will be a more significant headwind into UK growth than initially anticipated, with its forecast for GDP growth downgraded from 5% to 3.75% for this year. This is slower than what the IMF’s January forecasts for the Eurozone for this year. On its own, slower growth is expected to moderate demand-side inflation. On a more positive note, the Bank expects unemployment rates to continue to remain low.
“Whereas the impact on households is well-known, businesses are now embroiled in a very difficult balancing act between limiting rising input costs to their customers, maintaining market share in a less favourable growth environment and, at the same time, maintaining profit margins.
“The Bank’s policy action today influences medium-term, rather than short-term, inflation. We expect the Monetary Policy Committee to continue to monitor whether higher input and wage costs pass-through into higher prices. If this effect spreads from manufacturing and construction firms which we are currently seeing into the wider economy, it could presage faster action by the Bank.”
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