Feb 7 2013
Households are braced for further financial pain after policymakers warned of another two years of above-target inflation.
The Bank of England's Monetary Policy Committee (MPC) said inflation - already at 2.7% - was likely to rise further in the coming months and may remain above 2% for the next two years before falling back.
In an unexpected statement to support its decision to keep interest rates at 0.5% and economy-boosting measures on hold at £375 billion, the MPC said inflation has remained "stubbornly" high due to energy bill hikes and increases in university tuition fees.
Experts said they feared inflation would rise to 3% by the summer, while savers are expected to be punished with emergency low interest rates for some time yet. Investment banking giant Citi recently predicted rates would be held at historic lows until mid-2017.
The MPC said it was necessary to "look through the temporary, albeit protracted, period of above-target inflation" and that taking monetary action now could risk derailing the recovery.
Its comments came as incoming Bank of England Governor Mark Carney said he was keen for a review of the Bank's inflation target remit. Mr Carney - who will succeed Sir Mervyn King in July - told MPs in his first Treasury Select Committee hearing that while he believed there were "advantages" to growth targeting, he was "far from convinced" this would be a better alternative.
But he said there needed to be a debate to decide whether the remit to target 2% inflation should be changed, with regular reviews of the monetary framework thereafter.
Philip Shaw, chief economist at Investec Securities, said the unusual step to release a statement alongside a no-change decision could suggest the MPC was "somewhat fazed" by the Bank's upcoming quarterly inflation report, given that it would have had prior access.
"It may have judged that it needed to publish a statement to justify its stance of policy, not just with inflation likely to remain above the target over the next two years, but also in our view the likelihood that the Governor - perhaps Mark Carney soon after he takes over - will need to write a letter during the summer as inflation exceeds 3%," added Mr Shaw.
The Bank has come under increasing fire for failing to bring inflation back to target since the financial crisis. Sir Mervyn recently admitted that real take home pay was on average no better than it was in 2004 after a prolonged period of subdued wages growth and above-target inflation. The MPC sought to assure the UK economy is set for a "slow but sustained recovery", aided by a further easing in credit conditions.