Bank of England indicates massive increase in inflation for 2017

Posted by Neil Greenhill in Banking on 7 November 2016 - Neil is a Senior Credit Analyst at checkmyfile

The Bank of England has reassessed its 2017 inflation forecast in the wake of Brexit and increased its prediction to triple the current rate of inflation. The UK’s central bank now expects the rate of inflation to reach 2.7% next year, whereas the current level stands at 1%.

The dramatic increase in inflation is blamed on the slide in the value of the pound, which makes the price of imported goods more expensive. The Bank of England aims to keep inflation at around 2%, however after the predicted increases in 2017 it does not expect inflation to return to this level until 2020. Despite the Bank predicting a significant rise, others are suggesting that inflation may reach even higher levels. Earlier this week the National Institute for Economic and Social Research warned that inflation could reach 4% in the latter stages of 2017 with a rapid acceleration throughout the year as the cost of the falling pound is passed onto consumers by retailers.

Following its prediction of much higher inflation, the Bank of England warned that this could affect future decisions on where to set the interest rate. Increased inflation is traditionally reduced by increasing interest rates (which takes money out of the economy stemming price increases). In particular the Bank stated “there are limits to the extent to which above-target inflation can be tolerated”, indicating that should inflation increase too far the bank may have to act by increasing interest rates.

For the present, interest rates were left unchanged at 0.25%. Previous guidance issue in August indicated the Bank was ready to cut interest rates further if the economy had worsened, however the bank has now said this guidance has expired.

Reflecting that the immediate effect of Brexit has not been as dramatic as previously believed, the Bank of England increased its forecast for growth in the UK economy during 2017 from its earlier prediction of 0.8% to 1.4%. However, it simultaneously reduced its forecast for growth in 2018 to 1.5% down from 1.8%.

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