Bank expected to hold rates after traumatic year for economy

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The Bank of England is set to keep interest rates on hold this week in a quiet end to a dramatic year for the UK economy.

Policymakers are widely expected to hold rates at 0.25% amid further signs that growth has been surprisingly resilient since the Brexit vote in June.

But it comes amid mounting warnings over an inflation shock as households face a painful year ahead of price rises after the pound has plunged in value.

Experts fear this will bring an end to the consumer spending surge that has helped prop-up growth since the referendum.

Howard Archer, chief UK and European economist at IHS Global Insight, predicts the Bank will remain "pretty tolerant" on inflation and keep rates on hold throughout 2017 and possibly beyond.

But he added: "Given major uncertainties over the UK economic outlook as Brexit gets under way and develops, nothing can be ruled out."

The Bank halved the base rate in August as part of a mammoth economy-boosting package of measures and said more cuts were on the cards, though it has since rowed back on this as growth has proved better than expected.

Growth of 0.5% in the third quarter confounded expectations of a sharp slowdown from the 0.7% seen in the previous three months.

It saw the Bank scrapped plans for more rate reductions at its November meeting and raise growth forecasts for this year and next.

But this cheery outlook was overshadowed as it sent out a warning shot to households over soaring inflation.

While inflation dipped to 0.9% in October, Bank governor Mark Carney told Britons not to be fooled by the drop and cautioned sharp rises in the cost of living were coming.

Influential think-tank the National Institute of Social and Economic Research has predicted that inflation could hit close to 4% next year.

Mr Carney added further gloom as he said in a speech earlier this month the UK was suffering its first "lost decade" since the 1860s as real incomes have failed to rise in the last 10 years.

The Bank's decision on Thursday also comes amid mixed reports from key sectors of the economy, although experts believe growth will hold up well.

Services sector activity jumped to a 10-month high in November, according to the latest purchasing managers' index (PMI) survey, but just days later official figures showed a shock 0.9% contraction in the manufacturing sector in October.

Mr Archer said the manufacturing blow could see growth slow to 0.4% in the fourth quarter, but added this is unlikely to prompt any action from the Bank.

"Latest data and survey evidence point overall to the economy still holding up relatively well in the fourth quarter, with consumers still seemingly spending at a healthy rate," he added.

Meanwhile, economists expect inflation to reach a 25-month high when official figures are revealed on Tuesday. 

The cost of living is expected to hit 1.1% in November as firms and manufacturers pass down a sharp rise in input prices driven by the Brexit-battered pound. 

It comes after the Office for National Statistics (ONS) revealed that the Consumer Price Index (CPI) measure of inflation was 0.9% in October, down from 1% in September.