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Inflation at 2.6% as Bank of England leaves rates untouched

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The Bank of England has decided to leave interest rates at 0.25% in a 6-2 split decision, and announced that inflation is at 2.6% for June, up from 2.3% in March.

Governor Mark Carney also outlined an analysis of Brexit and options available to the bank’s Monetary Policy Committee (MPC). “The UK economy is beginning the process of adjusting to a new, as yet uncertain, economic relationship with the European Union,” he said today.

“Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises. And it can support UK households and businesses as they adjust to such profound change.”

Carney also said that markets, households and businesses reacted in different ways to the referendum outcome, with markets expecting poorer UK economic performance, households being slow to react but eventually slowing their spending, and businesses investing “less aggressively”.

“In the MPC’s central projection, GDP growth remains sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption,” he said. “Growth then picks up to just above its reduced – or modest – potential rate as net trade and business investment firm up and consumption growth gradually recovers in line with modestly rising household incomes.”

The MPC expects inflation to peak around 3% in October and to remain around 2.75% until early next year, Carney also predicted.

“Conditional on the current market curve, which implies that bank rate will rise by half a percentage point over the next three years, inflation is projected to remain a little above the target at the end of the forecast period – an overshoot that reflects entirely the effects of the referendum-related fall in sterling.”

 

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