Bank of England warns supply problems will slow UK economy

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The Bank of England has kept interest rates at a record low of 0.1 per cent and issued a more pessimistic forecast for the UK economy due to rising prices and widespread disruption in the supply of goods.

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There was speculation that the bank may raise its benchmark interest rate due to rising inflation. A hike in rates will likely mean rising costs for millions of borrowers, but analysts warned that rising borrowing costs too soon could stifle the economic recovery.

On Thursday, the bank’s Monetary Policy Committee (MPC) voted to leave the base rate unchanged as it cautioned that the UK and world economies grew slower than forecast in August.

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“Growth is somewhat hampered by supply chain disruptions,” MPC said in its latest quarterly report.

“The rapid pace at which the global demand for commodities has increased has led to supply constraints in some sectors. There have also been some signs of weakening UK consumption demand.

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Despite the problems, the MPC predicts the UK economy will return to its pre-pandemic levels by the first quarter of next year.

It expects economic growth to slow as the government rolls back its financial aid measures. The MPC said higher energy prices are also expected to put pressure on the economy.

Nine members of the MPC voted seven to two in favor of keeping the rate at 0.1 per cent. Committee members Michael Saunders and Dave Ramsden voted in favor of raising interest rates to 0.25 percent.

The central bank will also retain its £895bn quantitative easing program after six to three votes are in favour. Under the program, the bank creates fresh money and buys government debt.

The announcement came a day after the US Federal Reserve outlined its plan to withdraw some of the money pumped into the economy.

Rising inflation has prompted central bankers to consider raising interest rates in hopes of slowing rising cost of living. However, policy makers have had to balance the desire to keep price rises under control while supporting an economic recovery.

The two most important factors that increase the cost of living are shortages of supplies and workers, neither of which are expected to be solved by making borrowing more expensive.

Some borrowers have already seen their monthly interest payments increase in any case. Dozens of cheap mortgage deals have disappeared in the past month. According to Defaqto’s analysis, there were 22 fixed rate deals this week at less than 1 percent, compared to 82 deals on October 25.

The bank said on Thursday that “some slight tightening of monetary policy” is likely over the next three years to meet its target of keeping inflation within the target level of 2 per cent.

The MPC said it expects inflation to rise to a peak of 5 per cent from its current level of 3.1 per cent by 2024 before falling below the target level by 2024 in the second half of next year.

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Credit: www.independent.co.uk /

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