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. However, 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. 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 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. 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. Mr Bailey also said it was too early to judge what impact Brexit had delivered. The Bank’s predictions for 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.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of May 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.