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Slower growth, high inflation make awkward reading for Bank of England By Reuters


© Reuters. FILEPHOTO: At the height of the coronavirus pandemic (COVID-19), people walk by the Bank of England, London, Britain. REUTERS/Henry Nicholls


By Andy Bruce

LONDON (Reuters) – Bank of England rate-setters who may be tempted to vote next week for an early end to their COVID-19 stimulus plans are likely to hold off for now, with a slowing economy but surging inflation making for a tricky backdrop.

Last month, Michael Saunders was the only Monetary Policy Committee member to vote for an early end to the British central bank’s purchases of government bonds, on the basis that continued buying risked a more aggressive tightening of monetary policy in future.

Since then, BoE Governor Andrew Bailey revealed that four of the eight MPC members who voted last month – himself included – thought some initial conditions had been met to begin exploring the possibility of raising interest rates.

They will have to weigh data showing Britain’s economy slowed unexpectedly to a crawl in July against a record jump in the rate of consumer price inflation last month, which hit a nine-year high of 3.2% – far above the BoE’s target.

The BoE stated that inflation will rise to approximately 4% by the end of next year, but the rising prices have put officials under greater pressure to discuss how they intend to deconsolidate the last-year stimulus to support the economy during the COVID-19 epidemic.

Two new members of the MPC will be joining the group next week, creating more uncertainty for investors looking to determine the outlook on interest rates.

Gertjan Vieghe is replaced as an outside member by Catherine Mann. Huw Pill will replace Andy Haldane who is a hawkish economics specialist at Goldman Sachs.

Both markets and economists see the BoE increasing interest rates next year before any other major central banks. Watch out for any votes by Saunders to decrease the amount of quantitative easing purchases to 895 Billion Pounds.

Sandra Horsfield, an Investec economist said that Huw Pill is a wildcard in this regard. He is rumored to be more hawkish than the other end of the policy spectrum. However, there is not much information available.


Further information will be sought by investors about the BoE’s plans regarding when it will raise its interest rates. There are not many clues.

Robert Wood (NYSE:), economist at Bank of America Merrill Lynch, stated that “what we perceive as a dearth of guidance by the BoE leaves a possibility for the BoE to react to the inflation peak instead of looking through it.”

Wood stuck to his forecast for a first rate hike in May 2022 but said the stronger-than-expected rise in inflation made February an increasingly likely bet.

According to Reuters, economists believe that the BoE will raise borrowing costs before 2022 ends or sooner. [ECILT/GB]

Money markets currently see an almost 60% chance of a 15-basis point increase in February.

MPC members could also be reminded of past policy errors in similar situations such as those made by the European Central Bank to raise interest rates in 2012 in an attempt to combat high prices.

The Resolution Foundation think-tank estimates that up to 1,000,000 people may be without any financial help when the government’s furlough ends this month.

However, inflation may persist if there is disruption in supply chains due to Brexit or global shortages. Additionally, employers are having difficulty finding qualified workers to fill the vacancies. This puts more pressure on BoE to take action.