Bank of England says the case for cutting stimulus is growing - and that surging energy prices could keep inflation sky-high next year

• The Bank of England said it sees a growing case for reducing its support for the economy as inflation rises and employment recovers.
• The Bank also said that soaring energy prices could keep inflation at sky-high levels in 2022.
• It left its $1.2 trillion bond-buying package in place and interest rates at record lows for the time being.

The Bank of England has said the case for reducing its support for the economy is growing, even as it warned of the potential dangers of supply-chain problems and the surge in energy prices.

The BoE's monetary policy committee on Thursday kept its main interest rate at the record-low level of 0.1% and stuck to its plan to buy 895 billion pounds ($1.22 trillion) worth of bonds by the end of the year.

After the UK labor market continued to recover and inflation ticked up to a nine-year high since its last meeting, the Bank said that the case for "some modest tightening of monetary policy" over the next three years had grown stronger.

Despite this, the Bank said global supply-chain issues were likely to weigh on economic growth in the third quarter. Supply chains around the world have been struggling to cope with a jump in demand and have been hit rising coronavirus cases in many countries.

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The BoE also noted the soaring natural gas prices which have caused numerous energy suppliers in the UK to collapse and is close to causing political crises across Europe.

It said the surge in gas prices could well push up inflation by more than expected, and keep it above 4% well into 2022 - which would be the highest rate of inflation in decades.

The BoE previously said that it expected inflation to hit 4% by the end of 2021 before dipping, but said it could now stay higher for significantly longer.

However, the Bank still said it expects inflation to back towards its 2% target in 2023, helped by the modest tightening of monetary policy. It said it thinks "current elevated global cost pressures will prove transitory."

The pound rose sharply after the BoE's decision and statement and was last 0.7% higher at $1.372. The UK's FTSE 100 stock index was roughly flat.

Ambrose Crofton, global market strategist at JPMorgan Asset Management, said: "Looking ahead, we expect the Bank of England to be the first major central bank to achieve interest rate lift-off in the first half of next year."