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On Thursday, the Bank of England (BoE) announced that it would keep interest rates unchanged at 0.75%, admitting that any future increases would be ‘gradual’ but suggested that a rise to 1.5% over the next three years would help control inflation.
The BoE also signalled that a smooth Brexit would allow it to accelerate the pace of future rate rises and remove uncertainty for businesses that are holding back on investment until the government is able to offer clarity on the country’s future relationship with the EU.
UK economy in a state of flux
Governor of the BoE Mark Carney said in his opening remarks at the Monetary Policy Committee (MCP) meeting that a series of transitional events are underway that will impact the UK economy and shape monetary policy.
He began by saying that trade growth is slowing as global financial conditions tighten, with UK economic growth becoming more ‘uneven’ and likely to ‘decelerate towards its potential over the next few years’.
He also said that UK fiscal policy is becoming less restrictive in favour of a more ‘accommodative stance’ and that the UK economy is slowly adjusting to a ‘new, and yet uncertain, economic relationship with the European Union’.
The UK inflation rate fell to 2.4% in September from 2.7% in August. However, the current rate is still above the MPC’s 2% target, with higher energy costs and an increase in import prices as a consequence of sterling’s past depreciation keeping it above recommended levels, Carney said.
The BoE expects inflation to remain above the 2% target for the next three years, but by tightening monetary policy over the coming years it aims to reach its target by the end of 2021.