The Bank said the Prime Minister’s plans would see England brought out of lockdown faster than it expected, helping to deliver a “slightly stronger” rise in consumer spending than it previously predicted.
But minutes of the latest rates decision showed the outlook for the economy remained “unusually uncertain”, adding it was unclear how the spending boost would impact its forecasts for growth.
The rates decision comes amid growing concerns of an inflation surge at the end of the year, driven by the economic bounce-back, which has seen financial markets pencil in rate rises in 2022.
The Bank said consumer prices index (CPI) inflation – currently at 0.7% – is set to quickly return to around 2% in the spring, due in part to recent increases in energy prices.
It added: “The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the committee stands ready to take whatever additional action is necessary to achieve its remit.
“The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘’Although the bank is clearly still operating in crisis mode, continuing to heavily grease the financial wheels of the economy, it is shrugging its shoulders at the mini tantrum which has been playing out in the bond markets.
“There has been spike in bond yields over recent weeks, fuelling worries about just how affordable the government debt pile will be to service over the coming years.
“But the bank seems to take the position that the expected upturn in prices as the recovery continues, and the jump in oil prices feeds in, won’t lead to a sustained period of higher inflation in the medium term.
“That’s despite a more positive outlook for the UK economy, with the Bank expecting that Covid restrictions will be eased more quickly than it predicted last month, amid the rapid vaccine roll out programme and more government support for hard hit sectors.”
Laith Khalaf, financial analyst at AJ Bell, said: “Since the beginning of last month, markets have gone from worrying about negative interest rates in the UK, to pondering when monetary policy might tighten.
“The Bank of England provided a pretty bullish assessment of the prospects for economic recovery in its February monetary report and since then the outlook has got even better.
“Further support from the Chancellor in the Budget, a roadmap out of lockdown and fiscal stimulus spilling over from the US, all support the case for a robust bounceback, as the UK economy opens up in the coming months.
“But the message coming through from the Bank of England is that interest rates are going to remain nailed to the floor for the foreseeable future, despite the improving economic picture.
“The only thing that might prise rates upwards is a bout of inflation, but that would need to be both sustained and structural to compel the Bank of England to tighten policy.
“The Bank will look through rising inflation caused by temporary factors, such as recovering energy prices and would only deem inflation to be problematic if the UK was near full employment, which isn’t going to happen this year, or probably next.
“That’s an issue for people who’ve amassed cash savings throughout lockdown, as low interest rates and rising inflation spell a loss of buying power.
“That will encourage savers to spend money in the real economy, which is of course part of what the Bank is trying to achieve with low interest rates. However, the Bank estimates that consumers will only spend 5% of their excess savings from the pandemic, leaving most untouched and potentially lagging behind price rises, in bank accounts offering next to no interest.
“Meanwhile the market is taking matters into its own hands, with the 10 year gilt yield rising to its highest level since the middle of 2019, reflecting concern that inflation could be on the cards.
“Gilt yields are still extremely low, but the central bank will be hoping these inflation worries remain contained, as rising market rates could serve to choke off economic recovery, because borrowing costs would rise for consumers and businesses.
“The Goldilocks scenario is that the economy runs not too hot to cause rampant inflation and not too cold to cost livelihoods. But markets are beginning to price in the risk of higher inflation and those fears won’t be soothed by the fact that CPI will rise in the coming months, as energy price falls seen in the spring of last year begin to fall out of the equation.”
Tom Stevenson, investment director at Fidelity International, said: “What the Bank of England said was always going to be more important than what it did today. The two-way pull on the UK economy made no change to rates or bond purchases inevitable. The success of the vaccination programme and the re-opening schedule are positives but they are offset by Brexit red tape and the fiscal orthodoxy of the Chancellor. The Bank is right to wait and see.
“There are clearly differences of opinion in Threadneedle Street. Chief economist Andy Haldane is concerned that the inflationary genie is easier to let out of the bottle than to squeeze back in again. Governor Andrew Bailey sees a more balanced set of risks. They are both right and we don’t yet know whether the scale of pent up demand will offset the eventual end of furlough and other support measures.
“The Bank has today left the door open for a range of responses but the balance has clearly shifted towards a tighter bias while the prospect of negative interest rates is fast disappearing into the rear-view mirror. The outlook is slightly brighter than the Bank had thought.
“For investors, the choices are equally testing. We have experienced a significant rotation in the markets from growth to value and defensive to more cyclical. It is unclear whether this is a secular watershed or a more temporary reversal of relative fortunes. But history points to a change in leadership. Last year’s winners are unlikely to repeat the trick this year.”
Melissa Davies, chief economist at Redburn said: “The Bank of England remained ‘steady as she goes’ on policy today, leaving the QE programme and rates unchanged. Despite good news on growth, UK vaccinations and fiscal stimulus, the Minutes dwell on the significant amount of spare capacity remaining in the economy and the high degree of uncertainty over the employment outlook.
“Inflation is expected to rise briefly in the Spring but the Bank is happy to ‘look through’ this. Risks to mull over include the impact of Brexit on trading conditions and the progress of vaccination programmes elsewhere – it seems unlikely that the UK will fully evade the economic consequences of EU vaccination delays and the potentially serious risks to growth in the second half of 2021.”