The Bank of England has kept interest rates on hold as it said the rapid rollout of the vaccination programme and road map for easing restrictions would help drive an economic rebound this year.
The Bank said the Prime Minister’s plans would see England brought out of lockdown faster than it expected, helping to deliver a “slightly stronger” rise in consumer spending than it previously predicted.
But minutes of the latest rates decision showed the outlook for the economy remained “unusually uncertain”, adding it was unclear how the spending boost would impact its forecasts for growth.
The rates decision comes amid growing concerns of an inflation surge at the end of the year, driven by the economic bounce-back, which has seen financial markets pencil in rate rises in 2022.
The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainablyBank of England
The Bank said consumer prices index (CPI) inflation – currently at 0.7% – is set to quickly return to around 2% in the spring, due in part to recent increases in energy prices.
It added: “The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the committee stands ready to take whatever additional action is necessary to achieve its remit.
“The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”
The Bank forecast in February that the economy would start bouncing back strongly from the start of the summer, helped by the progress of the coronavirus vaccination programme.
It said in the latest minutes of the Monetary Policy Committee (MPC) meeting that since then, “rates of Covid infections and hospitalisations had fallen markedly across the United Kingdom and the vaccination programme was proceeding at a rapid pace”.
The Bank added: “Plans for the easing of restrictions on activity had been announced and envisaged that restrictions could be lifted somewhat more rapidly than had been assumed in the February report.”
It said this “might be consistent with a slightly stronger outlook for consumption growth” in the second quarter.
“Looking ahead, the expected easing of Covid restrictions made it likely that there would be increases in both supply and demand over the coming months,” according to the minutes.
The move to extend furlough as part of extra Covid-19 support measures announced in the Budget earlier this month would also contribute to a lower-than-feared rise in unemployment in the near term, the Bank said.
It stressed it would assess the full impact of Budget policy measures on the economic outlook in its May forecasts.
Official figures last week showed the economy contracted by 2.9% in January as the lockdown took its toll, but this was less than feared and a far cry from the double-digit fall of last April at the height of the first wave.
Bank governor Andrew Bailey said on Monday that he was more positive over the future of the economy and expected it to return to pre-pandemic levels at the end of the year thanks to the vaccine programme’s “huge” success.
But he added that his increased optimism came with a “large dose of caution”.
Howard Archer, chief economic adviser to the EY Item Club, said the Bank “comes across overall as more upbeat on the UK economy”.
He added: “The MPC also considered that developments in global growth had been a little stronger than they had expected in February, while the major US fiscal stimulus package should provide significant extra support.”