MercoPress. South Atlantic News Agency

Bank of England minutes reflect “uncertainty” and fears of inflation

MPC members believe more money should be pumped to the UK economy

Inflation in the United Kingdom has proved more stubborn than expected and is now no longer estimated to fall below 1% this autumn, according to minutes from the Bank of England's rate-setting committee. But there is still a lot of uncertainty about the economy and the impact of the ongoing reluctance of banks to lend.

And while near-term inflation may exceed initial forecasts, the Monetary Policy Committee, MPC, believes that UK inflation will be extremely volatile – falling in September before rising again, as past changes in prices drop out of the 12-month comparison, the VAT cut is reversed and other tax changes have an impact.

The committee believes this will be “temporary”, suggesting they expect interest rates to stay at current record low levels for many months yet. And while there were some tentative signs that moves to pump billions of pounds into the economy were having an effect and the economic backdrop was improving, some committee members still believe more cash injections may be needed.

They said the near-term downside risks to economic activity had lessened and there was a possibility that the recovery in asset prices and confidence could mark the start of a virtuous upward spiral for the economy. The members also believe UK’s second-quarter GDP will be revised upwards, but said it is still difficult to know how much impact the financial crisis and high levels of public debt will have on future growth.

Recent indications from MPC members also show that they are still very concerned about the lack of bank lending, particularly to small and medium-sized firms, he said.

The committee voted unanimously to keep interest rates as 0.5% and should continue with plans to spend £175 billion buying assets from the banks.