The Bank of England has upgraded its growth forecast for the coronavirus-hit UK economy and signalled it will not raise interest rates in the near term – despite seeing a looming spike in inflation ahead.
The latest meeting of the central bank’s interest rate-setting committee left policy unchanged, with rates remaining at their COVID-19 crisis low of 0.1% as analysts had widely expected.
Its £895bn programme of asset purchases, known as quantitative easing, was also kept static.
But its quarterly Monetary Policy Report said that the vaccine-led recovery from the sharpest hit to the economy in over 300 years in 2020 was clearly under way at a greater speed than initially expected.
The Bank said it now saw growth of 7.25% during 2021, which would be the strongest since 1941.
That is up from the 5% growth previously forecast.
The Bank now sees GDP falling by just 1.5% in the lockdown-hit first quarter compared to the plunge of over 4% feared in February.
The report said: "GDP (gross domestic product) is expected to rise sharply in 2021 second quarter, although activity in that quarter is likely to remain on average around 5% below its level in the fourth quarter of 2019.
"GDP is expected to recover strongly to pre-COVID levels over the remainder of this year in the absence of most restrictions on domestic economic activity."
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The Bank forecast that consumer spending would be a main driver of the recovery – with people spending an estimated 10% of their accumulated lockdown savings.
But it warned of potential "downside risks" to its outlook from new coronavirus variants – and governor Andrew Bailey told a news conference people should not get "carried away" by the recovery.
He spoke of two years of lost output growth, and added: "On balance, the MPC (monetary policy committee) judges the risks to the central projection for GDP to be skewed to the downside in the first year of the forecast period, but broadly balanced further out."
Mr Bailey also said it was too early to judge what impact Brexit had delivered.
The Bank’s predictions for an acceleration in growth were backed up by a closely-watched survey of firms, released earlier on Thursday, which pointed to the largest leap in business activity since 2013 in April for the services sector.
The IHS Markit/CIPS Purchasing Managers’ Index (PMI) recorded a reading of 61 – up from 56.3 in March – with any reading above 50 indicating growth.
It noted "sharp increases" in both business and consumer spending as coronavirus restrictions continued to ease.
The latest series of PMI reports have also highlighted spikes in prices for companies through higher transport and raw material costs.
The services PMI reported the steepest rise in costs for businesses in over four years and widespread evidence those are being passed on down the supply chain.
Mr Bailey said there was little evidence yet of a feed through to output prices, but in its report the Bank said it expected the Consumer Prices Index (CPI) measure of inflation to shoot up beyond its 2% target by the end of the year from its current level of 0.7%.
It highlighted a surge in energy prices as a primary cause, but added that it was not unduly concerned about the outlook, with CPI tipped to fall back to target quickly, and suggested rates would remain at current levels in support of the recovery.
That message mirrors commentary from other central banks, including the US Federal Reserve, which has signalled it is prepared to tolerate surging inflation by maintaining support they have provided for their economies to help employment recover.