Bank of England warns households to expect sharp rise in inflation next year

Monetary policy committee predicts inflation will rise from 1.3% this year to 2.7% in 2018 and drops plans for further interest rate cut. The Bank of England has warned households to expect a sharp rise in inflation next year as the weak pound ramps up the costs of imports and squeezes family finances.

Predicting rises in petrol prices and other goods that the UK buys in from abroad, the Bank said inflation would rise from 1.3% this year to 2.7% in 2017 and 2018, higher than in its last set of forecasts three months ago. In its new outlook, the monetary policy committee (MPC), led by the Bank’s governor, Mark Carney, said it would take until 2020 for inflation to get back to the target of 2% set by the government.

The new forecast was delivered as the Bank kept interest rates at a record low of 0.25% and dropped plans to cut them further in the near future, although the inflation warning was tempered with a projection that economic growth will be much stronger than previously forecast in the near-term.

The pound tumbled to 30-year lows in the wake of the vote to leave the EU and has come under fresh pressure in recent weeks over investor fears that the UK is heading for a hard Brexit deal that would leave it shut out of Europe’s single market. The sharp depreciation has made UK exports more competitive but imports more expensive – prompting changes to inflation forecasts.

Carney, who has been forced to fend off criticism that he was overly gloomy on the potential blow to the economy from a leave vote, said on Thursday that sterling’s sharp fall made the Bank’s usual balancing act more challenging.

He described the UK as facing “exceptional circumstances” and said the MPC was making a trade-off between keeping inflation in check and shoring up growth. For now, record-low interest rates and a big programme of electronic money printing, known as quantitative easing, was appropriate, he said.

“The MPC is choosing a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment. However, there are limits to the extent to which above-target inflation can be tolerated,” Carney told a news conference.

His comments about the Bank’s sensitivity to inflation picking up were interpreted by investors as a signal that policymakers were in no hurry to consider cutting interest rates further. Another rate cut would likely put more pressure on the pound and further stoke price pressures in the economy.