Bank of England warns gas prices will push inflation over 4% this year

The Bank of England set nerves jangling about rising inflation today as it admitted soaring gas prices and supply chain problems will add to the pressures.

The latest report by the Monetary Policy Committee said CPI inflation is now expected to be ‘slightly above’ 4 per cent in the fourth quarter of the year.

Although the surge is still expected to be ‘transitory’, it warned that developments over the past month – including the energy crisis – have ‘strengthened’ the view that action will be need to return to the target of 2 per cent. 

The rate could remain above 4 per cent into the second quarter of next year, the committee said. 

Bank staff have also revised down their expectations for the recovery, with GDP still set to be 2.5 per cent below its pre-Covid level in the third quarter of this year.  

The MPC kept interest rates on hold at 0.1 per cent and the quantitative easing programme at £895billion. 

The Bank of England now expects inflation to be above its August forecast (pictured) - rising higher than 4 per cent this year and potentially staying there until the second quarter of next year

The Bank of England now expects inflation to be above its August forecast (pictured) - rising higher than 4 per cent this year and potentially staying there until the second quarter of next year

The Bank of England now expects inflation to be above its August forecast (pictured) – rising higher than 4 per cent this year and potentially staying there until the second quarter of next year

Bank of England governor Andrew Bailey has insisted inflation will subside over the medium term despite mounting concerns

Bank of England governor Andrew Bailey has insisted inflation will subside over the medium term despite mounting concerns

Bank of England governor Andrew Bailey has insisted inflation will subside over the medium term despite mounting concerns

Official figures showed the CPI rate spiked to 3.2 per cent in August, well above the Bank's 2 per cent target

Official figures showed the CPI rate spiked to 3.2 per cent in August, well above the Bank's 2 per cent target

Official figures showed the CPI rate spiked to 3.2 per cent in August, well above the Bank’s 2 per cent target

Kwarteng says weather could determine fate of gas prices 

Kwasi Kwarteng today suggested people should be hoping for a warm autumn to ease gas prices – as ministers were slammed for refusing to boost storage capacity years ago.

Dragged back to be grilled by MPs on the crisis, the Business Secretary stressed the weather is the ‘single most important determiner’ of costs. The comment came hours after Boris Johnson made a speech at the UN warning of the dangers of climate change.

But he repeated that there will be no ‘reward for failure’ bailouts for collapsing energy firms, amid warnings that big suppliers will soon come ‘cap in hand’ for support.  

Mr Kwarteng has admitted there are no guarantees that gas prices will go back to previous levels, despite the government striking a deal to stave off a shortage in CO2 threatening to cause food shortages. 

As the problems bite, there have been calls for VAT to be cut on energy bills while ministers are believed to be looking at a windfall tax on fatcat energy firms profiteering.

Meanwhile, there are complaints that ministers did not heed pleas to increase the UK’s gas storage capacity – which could have given more time to handle the pressures.  

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The MPC said the downward revision on GDP ‘in part reflects the emergence of some supply constraints on output’. 

The report said developments over the past month have ‘strengthened’ the case made in August that some tightening of monetary policy could be necessary to meet the central bank’s 2 per cent inflation target sustainably in the medium term.

The headline CPI rate spiked in August to 3.2 percent, the highest in nearly a decade, after the Covid-hit economy reopened. 

However, the MPC added that ‘considerable uncertainties remain’.

‘Against a backdrop of robust goods demand and continuing supply constraints, global inflationary pressures had remained strong and there were some signs that cost pressures might prove more persistent,’ the minutes said.

‘Oil prices had remained elevated and global shipping costs had continued to rise. Wholesale gas prices had risen substantially across Europe.’ 

The report said that inflation will be ‘slightly higher than the projection in the August Report’ of 4 per cent.

‘Around half of the near-term projected above-target inflation was expected to be accounted for by elevated energy price inflation,’ the MPC said. 

‘The projected contribution of energy prices from October 2021 reflected a base effect as well as Ofgem’s most recent announced increases in the standard variable tariff caps on retail gas and electricity prices. 

‘Spot and forward wholesale gas prices had risen materially since the publication of the August Report, against a backdrop of strong demand and some supply disruption. 

‘This could represent a significant upside risk to the MPC’s inflation projection from April 2022, when Ofgem next updated its retail energy price caps based on the relevant forward contracts, and meant that CPI inflation would remain slightly above 4 per cent into 2022 Q2, all else equal.’  

The Bank stressed that it will monitor developments in the labour market, including the impact of cost increases on business and employees.

The MPC’s nine members voted unanimously in favour of holding rates at 0.1 per cent.

The central bank will also keep up its £895billion quantitative easing programme following a seven to two vote in favour.

Committee members Michael Saunders and Dave Ramsden voted against, calling for a cut to £860billion.

Grilled by MPs on the energy crisis today, Business Secretary Kwasi Kwarteng stressed the weather is the 'single most important determiner' of natural gas prices

Grilled by MPs on the energy crisis today, Business Secretary Kwasi Kwarteng stressed the weather is the 'single most important determiner' of natural gas prices

Grilled by MPs on the energy crisis today, Business Secretary Kwasi Kwarteng stressed the weather is the ‘single most important determiner’ of natural gas prices

Despite pressure to rein in rising prices, the Bank is holding off from any action that could destabilise the economic recovery as growth starts to falter and ahead of the furlough scheme ending this month.

‘Key questions include how the economy will adjust to the closure of the furlough scheme at the end of September; the extent, impact and duration of any change in unemployment, as well as the degree and persistence of any difficulties in matching available jobs with workers,’ the Bank said.

Economist Samuel Tombs at Pantheon Macroeconomics said the Bank was ‘in a holding pattern until the impact of the end of furlough is known’.

‘In our view, the outlook for building labour market slack and a tough fiscal consolidation suggests that the MPC will be able to wait until early 2023 to raise Bank Rate again.’

James Smith at ING added: ‘We think there are too many headwinds facing the growth outlook over the winter for this, or indeed a February rate hike to materialise.’

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