The Bank of England remains on track to raise interest rates in the first half of 2022. The pound rose against the euro and US dollar following the bank’s update to keep rates the same. The Monetary Policy Committee voted 9-0 to leave the Bank rate at just 0.1% and to maintain its quantitative easing bond-buying programme at £895bn. Deputy governor Dave Ramsden and Michael Saunders, voted against this, as they wanted to stop the QE programme early by reducing the amount of UK government bonds the BoE buys. While the bank was not 100% yet positive as there are uncertainties about the global economy and the labour market, the pound is expected to regain some of its losses but not to climb to new highs.
According to Bloomberg, City traders have revised their forecast for the first interest rate to 0.25% after the Bank of England’s outlook for the UK economy has improved and that tightening of its QE programme could commence soon. After Thursday’s meeting, markets now expect a 15-basis-point increase in March 2022, a month earlier than their expected one for May. They also expect a rise of 0.5% in November 2022. With markets now pricing an increase in March and two hikes by the end of next year, investors will be focusing on the bank’s November meeting when a new set of forecasts will be announced.
The Bank of England has warned that inflation will rise above 4% by the end of this year, due to the energy crisis. The rise in gas prices is considered a risk to its projections for inflation and it has warned that inflation could remain above 4% into the second quarter of next year making things harder for households. The MPC expects that global cost pressures would prove temporary.
Growth forecasts lowered
The Bank of England has lowered its growth forecasts as supply chain problems are impacting output. Expectations for growth in the third quarter have been revised from 2.9% to 2.1%. The Bank has warned that supply problems such as access to raw materials and staff shortages are affecting economic growth. The Bank also highlighted that global recovery has lost momentum and inflationary pressures will continue.
Tightening monetary policy
The case for tightening monetary policy seems now stronger. Consumer price inflation rose to 3.2% while global cost pressures and supply problems are pushing consumer goods prices higher. CPI inflation is expected to fall back to the bank’s 2% target in the medium term, but the bank has also pointed out that: “Indicators of households’ medium-term inflation expectations have increased in recent months, with the Citi/YouGov five-to-ten year ahead measure at its highest level since 2013 in September.”
The BoE is also under pressure, as other central banks such as the ECB and Federal Reserve have announced that they will begin unwinding their financial support. If the BoE does not act in the same timeline, Sterling could fall, pushing inflation and prices higher. A rising pound will push the cost of imports lower and will act as a deflationary force.
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