After the steep fall in the value of the sterling after the Brexit vote, expectations for inflation has risen. A fall in the value of the pound meant that goods brought into the UK are more expensive. This means that firms will past on their costs onto their consumers in the form of higher prices, which increases inflation. Sterling fell as much as 20% against the US dollar after the EU referendum in June. The Bank of England and many private economists say inflation is set to carry on increasing sharply in 2017. The quarterly survey, which was published on Friday, illustrated average public expectations for inflation over the next 12 months rose to 2.9% in February from 2.8% in the previous survey in November. And taking a five-year view, inflation is expected to be at 3.2% compared with 3.1% that was expected three months earlier.
The Bank’s Monetary Policy committee was divided on the decision about interest rates. Kristin Forbes is a member of the committee, who voted to raise interest rates as she felt that inflation was rising too quickly and that it could become a problem in the near future. Other members also indicated that they could join her in the future meetings if they began to feel the same. Ian McCafferty, who voted for an increase in the rate in early 2016, was the most likely member to join Forbes (according to analysts). Other members included Michael Saunders who came across as enthusiastic about the economy in a speech he made in January.
Forbes believes that inflation is likely to remain above the Bank’s 2.0% target for at least three years. She voted against the rest of the committee and wanted an increase in the base rate to 0.5% from 0.25%. The rest showed that the Bank of England did not want to follow the US Federal Reserve, which raised base rates on Wednesday. This was the first disagreement the committee faced since after the Brexit vote in July 2016 (when Jan Vlieghe voted for a cut in the costs of borrowing from 0.5% to 0.25% - the majority of the committee opposed him but in August 2016, they voted for a cut).
Last month, the Bank of England said it expected the economy to grow by a relatively strong 2.0% this year but was likely to slow down after the uncertainty with the country’s involvement with countries in the European Union, as they buy roughly half of Britain’s exports. This week, economists pointed out that wage growth was “notably slower” than they had thought even though the unemployment rate is now 4.7%, marking its lowest level since the summer of 2005 said the ONS, which economists say it nearly at full employment.