Reacting to the Bank of England’s MPC’s decision to hold interest rates, Julian Jessop, Economics Fellow at the Institute of Economic Affairs said:

“The Monetary Policy Committee’s decision to keep interest rates on hold this week was no surprise, but the accompanying language was more hawkish than expected.

“This was always a difficult balancing act. It is still right to look past the temporary impact of the surge in energy prices, especially as these will also dampen economic activity. Nonetheless, it will take time to gauge all the second round effects, including on inflation expectations.

“Given all the current uncertainty and after leaving interest rates too low for too long in the wake of the pandemic, the Bank can be forgiven for erring on the side of caution.

“The Bank has already raised their own inflation forecasts. Consumer price inflation is now expected to rise from 3% in January to around 3½% in March and still average around 3% between April and June. Previously, the Bank had expected inflation to drop to just above 2% target next month, reflecting the falls in regulated prices.

“The Bank then warns that inflation could rise further, perhaps to 3½%, largely depending on what happens to the Ofgem cap in July. In these circumstances, it was no surprise that the vote to hold rates was unanimous, and that many members chose to emphasise the risks that inflation remains well above the 2% target for even longer.

“Indeed, if the Bank staff ran the numbers again this morning (after the overnight jumps in the prices of both oil and natural gas), the inflation projections could all be at least ¼% higher.

“In short, the Bank’s job is to worry about inflation, not growth, and it cannot ignore these upside risks.”