MPC keeps a close eye on inflation forecasts

The Bank of England’s Monetary Policy Committee has revealed it is keenly monitoring inflation forecasts as it considers whether or not to raise interest rates.

Minutes from the MPC’s meeting on April 7 and 8 show that the committee voted unanimously to keep the base rate at 0.5%, while maintaining its £200bn quantitative easing budget.

But the MPC is concerned that although the public’s inflation expectations are stable for the medium-term, there is some evidence that those in the financial markets think inflation is set to creep up.

The minutes say: “Given that a period of above-target inflation was in prospect at a time when monetary policy was exceptionally accommodative, this was a source of concern to some members.

“The Committee would continue to monitor developments in inflation expectations closely.”

The latest data from the Office for National Statistics published yesterday shows that the annual rate of inflation as measured by the Consumer Prices Index hit 3.4% in March, up from 3% in February.

The MPC says there are factors which are restraining activity and inflation, such as the weakness of the banking sector, the need for fiscal consolidation, and the spare capacity in the economy.

But the drop in the value of the pound and the £200bn that has been spent on quantitative easing are also driving activity and inflation upwards.