The Bank of England’s Monetary Policy has voted by a majority of 7-2 to maintain Bank Rate at 0.1%.

The UK economy continues to recover from Covid

“As more people have been vaccinated, restrictions to control the spread of the virus have been lifted [...], the UK economy is recovering from the impact of Covid”, the Bank has highlighted.

This has resulted in a rise in spending by households and businesses. Unemployment has fallen, although the number of people out of work is still higher than it was before the pandemic. Overall, the size of the UK economy is getting close to where it was before the pandemic hit.

Interest rates are expected to rise modestly to return inflation to the 2% target

When the Covid pandemic struck, the Bank ‘needed to take immediate and substantial action’ to meet their inflation target, which included a cut in interest rates to 0.1% in March 2020. The UK economy is recovering, unemployment has fallen, and the Bank expect inflation to rise further to around 5% by spring next year.

The Bank expect interest rates will need to rise modestly to return inflation to the 2% target.

The Bank of England expects inflation to rise to around 5% in the spring, but then fall back

Following the expected rise to around 5% in the spring next year, the Bank expects inflation to fall back, partly due to the fact that the impact of higher oil and gas prices will fade. The Bank also does not think that the demand for goods will continue to rise as fast, plus some of the production difficulties businesses are facing will ease.

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