Concerns over inflation creeping up as the economy makes a recovery from the pandemic have been shrugged off by the Bank of England.
Consumer price inflation exceeded the Bank’s 2% target in the year to May, hitting a two-year high of 2.1%.
The Bank’s Monetary Policy Committee (MPC) said in its latest statement that the Bank anticipated inflation to exceed 3% “for a temporary period”.
MPC members voted 9-0 to maintain interest rates at the current historic low of 0.1%.
Interest rates have remained the same since they were reduced to help buoy the economy from the fallout of the Covid-19 crisis last March.
"Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory," said the Bank.
The Bank now expects the UK economy to make a much faster recovery than it has previously forecast.
The bank said that June’s output was now anticipated to be around 2.5% lower than its pre-Covid level.
"Output in a number of sectors is now around pre-Covid levels, although it remains materially below in others. The housing market remains strong, and indicators of consumer confidence have increased," the Bank said.
The MPC said that pushing back the relaxing of Covid restrictions until 19 July were likely to have “relatively small” implications when compared with the impact of previous lockdowns.
"The Committee's central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back," the MPC said.
"There are two-sided risks around this central path, and it is possible that near-term upward pressure on prices could prove somewhat larger than expected.
"Taking together the evidence from financial market measures and surveys of households, businesses and professional forecasters, the Committee judges that UK inflation expectations remain well anchored."
The MPC also voted 8-1 to continue with the Bank’s current asset purchase initiative - maintaining a £895bn target for the purchase of bonds.
Senior economist at Aberdeen Standard Investments, Luke Bartholomew, pointed out that departing chief economist Andy Haldane was the one lone voice against the Bank’s quantitative easing programme.
"It will be extremely interesting to see who replaces [Mr] Haldane in the chief economist role following his imminent departure," Batholomew said.
"It is likely the Bank will drift back into a more relaxed tone on the transitory nature of any inflation pressure once [Mr] Haldane's voice and vote has moved on."
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