Bank of England keeps rate unchanged while anticipating inflation
The Bank of England chose not to cut interest rates at its latest policy meeting, and warned it anticipate inflation will accelerate to 2.75% in 2018. Governor Mark Carney said the rise was due to "volatility in sterling and risks to growth", but anticipated inflation will fall back to 2.5% in 2019. There are "limits to the extent to which above-target inflation can be tolerated", the bank said in its quarterly inflation report.

The Bank of England has warned that households face a sharp upturn in inflation over the next few months after tearing up its economic forecasts.

The rise in the cost of living is now predicted to shoot up to 2.7% next year, nearly three times its current level of 1%.

It could mean a shock for families if wage growth fails to keep pace, meaning a squeeze on income in real terms.

That would threaten to derail the resilient household spending that has helped the economy shake off Brexit woes.

The new outlook for inflation - as well as an upgrade for the wider economy - means the Bank has dropped the suggestion that it could cut interest rates to near-zero to stimulate growth.

It even hinted that rates could go up if inflation rises above a level that "can be tolerated".

Please use Chrome browser for a more accessible video player 2:04 Mark Carney: Economy is 'solid'

In August, forecasts unveiled by governor Mark Carney suggested a much gloomier picture for gross domestic product (GDP) in the wake of the Brexit vote.

But while economic growth has slowed, GDP expansion of 0.5% in the quarter after the referendum was better than expected and removed the need for a further rate cut this month to shore up the economy.

The Bank has increased its forecast for 2016 growth as a whole from 0.8% to 1.4%, though it does expect to see the economy face difficulties further ahead as uncertainty hits business activity.

Advertisement

Meanwhile the sharp hit to the value of the pound since the referendum presents a new inflation challenge after a long period during which it has been close to zero.

The slump in sterling will mean imported goods become more expensive.

The Bank's prediction of inflation rising to 2.7% next year would take it to its highest level since 2013.

It expects the rate of inflation to remain at 2.7% in 2018 and tick only slightly lower to 2.5% in 2018 - suggesting three years of a rise in the cost of living at a higher rate than the Bank's 2% target.

Please use Chrome browser for a more accessible video player 2:20 What Carney said in August

The cost of food, fuel and clothing will go up, according to the its quarterly Inflation Report.

Some economists think the Bank's inflation outlook is too low, with think-tank the National Institute of Economic and Social Research (NIESR) warning earlier this week of inflation close to 4% next year.

:: Bank of England left embarrassed by forecast u-turn

The Bank's signals on interest rates, together with the High Court ruling to order a parliamentary vote on triggering the Brexit process saw the pound climb to its highest level against the US dollar for nearly a month.

Please use Chrome browser for a more accessible video player 2:32 Divided opinions on Mark Carney

Governor Mark Carney spoke publicly for the first time about his decision earlier this week to extend his term to 2019 - but not the full term of eight years.

He told Sky News it was an "absolute privilege" to have his role as the UK enters a crucial period of leaving the EU and the Bank reacted to the impact on jobs, growth and inflation.

"I did feel a responsibility to try to provide some continuity over that time frame, so I'm very pleased to be able to do that," he said.