Investors were disappointed that the Bank of England held interest rates steady on Thursday. This would have meant it was not the first major central bank to raise rates following the COVID-19 pandemic.
The BoE maintained the possibility of tighter monetary policies soon. It stated that it would likely have to increase Bank Rate from 0.1%, its record low, “overcoming months”, if the economy performs as expected.
Seven of its nine policymakers voted against a rate increase in order to see how many people become unemployed after the recent termination of the government’s job protection furlough program.
Only two members, Deputy Governor Dave Ramsden (and Michael Saunders) of the Monetary Policy Committee, voted in favour of an immediate rate increase by 15 basis points.
According to the BoE, most MPC members believed “there was value waiting for additional inflation on near term developments in the labour market” before they decided to ease off on stimulus. This warning against premature tightening was also issued in September.
On Thursday, Britain’s statistics agency reported that survey evidence indicated that most workers who had been on the furlough program of the government at the close of September had returned home to their employers within the same hours.
MPC members who voted no to a rate increase now also pointed out a slowdown in consumer demand and the possibility that higher inflation could impact household spending.
According to Reuters, economists expected a 6-3 vote to keep Bank Rate on Hold. This contrasts with the close certainty investors had about a rate increase after Governor Andrew Bailey said last month that it was necessary to control inflation expectations.
New forecasts by the central bank showed a less optimistic picture of Britain’s economic growth, as global supply chain bottlenecks continued to impede economic growth.
The fifth-largest economy in the world was seen to regain its pre-pandemic size during the first quarter of 2022. This was later than the BoE’s August projection.
The expected rate of economic growth in Britain for 2021 has been lowered to 7%. In 2022, the forecast was reduced to 5% from 6%. The growth rate is expected to fall sharply to 1.5% by 2023 and 1% by 2024.
After a spike in global energy prices in April, inflation rose to around 5% next year. Then, it fell back to the 2% target set by the central bank at the end its three-year forecast period.
This projection was based upon the BoE’s normal practice of using energy prices forecasted by futures markets for six month’s time and then assuming that prices remain the same for the remaining three-year forecast period.
The BoE however, drew attention to an alternative scenario that included a drop in futures prices, as well as the price adjustment to energy markets.
This scenario indicated that inflation would likely be “materially lower than” its 2% target for the second half-year of its three year period. If interest rates rise as quickly as markets anticipate, this scenario will also indicate that inflation is likely to be “materially less”.
Investors were sent a message by the inflation forecasts that they had been pricing in too many rate increases by the BoE. According to the BoE, the Bank Rate will reach 1% by 2022 according to the interest rate pricing.
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