The forecast for the U.K. economy is unusually uncertain. Prices have been rising at a faster rate than the central bank's 2% target in 41 out of the past 50 months, and inflation is forecast to remain above that level throughout next year. That means there is a risk that wage demands will increase, setting off a fresh round of price gains as businesses look to cover their higher costs.
The government is set to cut spending at a time when bank lending remains impaired, the U.K.'s major export markets are still fragile and much spare capacity remains in the economy, and over the medium term that may lead to an inflation rate that is below the central bank's target.
Bank Of England Holds Interest Rates
That lack of clarity about the outlook for prices resulted in a three-way split in the MPC's vote at the October and November meetings, with Adam Posen calling for an expansion in its quantitative-easing policy of buying bonds with freshly created central-bank money, Andrew Sentance for a modest rise in rates, and the majority opting for no change.
With the uncertainty likely to linger, it seems unlikely that either dissenter will win over a significant number of his colleagues any time soon.
However, recent signs that exports are picking up and will provide support to the economic recovery suggest that the BOE's next move is more likely to be a hike in its key interest rate rather than an increase in its bond purchases.
"We continue to doubt that the Bank of England will look to raise interest rates next year, but acknowledge that the prospect of a second round of quantitative easing has clearly receded," said James Knightley, an economist at ING Bank.
Bank Of England Holds Interest Rates
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