Squeeze to stay as inflation outlook worsens

Minutes from the Monetary Policy Committee (MPC) said the rise of oil prices and probable increase in utility bills and food costs meant the rate of inflation would not fall as rapidly as predicted at the time of the Bank’s August inflation report.

However, the nine-strong panel left the door open for further emergency support as it warned against a “subdued and uncertain” outlook and said additional stimulus was more likely than not to be needed.

The MPC voted unanimously in favour of maintaining interest rates at record lows of 0.5% and keeping the level of quantitative easing at £375bn, following a £50bn boost in July.

The minutes said that despite recent efforts to tackle the eurozone debt crisis, “very substantial risks were likely to remain for some time to come”.

The committee also raised “the risk of a sharper slowdown in emerging economies”.

In light of the weak outlook for growth, the Bank signalled further QE was likely in the months ahead with some economists still backing a further cut in interest rates.

Martin Beck, UK economist at Capital Economics, said: “September’s minutes do little to diminish the prospects of further policy stimulus over the coming months. We still expect another £50bn ... to be announced at November’s meeting and for QE to ultimately reach £500bn.

“We also think there continues to be a decent chance of an interest rate cut in November.”

The rate of inflation edged down to 2.5% in August from 2.6% in July, official figures revealed, amid warnings from economists over the rising cost of living.

Droughts in the US are likely to mean higher food prices while more energy price rises are in the pipeline this autumn.

The Bank, tasked with keeping inflation as close to the Government’s 2% target as possible, previously said the rate would fall throughout 2012 and into 2013.

The minutes from the MPC meeting said: “The rise in oil prices and the probable increase in utility and some food prices meant that the near-term outlook was for a less rapid fall in inflation than the committee had thought.”