Written by William Schomberg, David Milliken

LONDON, Thursday 4 November (Reuters) – The Bank of England held interest rates steady on Thursday. Investors had been expecting a rate hike, but the Bank of England canceled that expectation. It would have become the largest central bank to increase rates following the COVID-19 pandemic.

If the economy performs as expected, the BoE maintained the possibility of tighter monetary policies soon. It stated that it will likely have to increase Bank Rate from the historic low of 0.1% in the coming months.

Seven of nine of the policymakers decided to delay a rate increase for the moment, so that they could assess how many people have lost their jobs following the end of the job-protecting furlough program.

Two members of the Monetary Policy Committee, Deputy Governor Dave Ramsden (left) and Michael Saunders (right), voted in favor of an immediate rate increase by 15 basis points.

After the U.S. Federal Reserve announced Wednesday that they would begin to reduce their bond-buying program this month as a prelude to its first rate hike, investors are expecting it in mid-2022, the BoE has taken a cautious approach.

More explicit statements have been made by the European Central Bank about their determination to maintain stimulus flows into the euro area economy. Christine Lagarde, the President of the European Central Bank, stated Wednesday that it was unlikely for them to increase rates next year.

The BoE announced that the MPC voted in favor of the BoE’s government bond-buying program reaching its maximum size of 875 Billion pounds. Catherine Mann joined Ramsden and Saunders for the reduction of that component of BoE’s stimulative programme.

Total asset purchases remained stable at 895 Billion pounds, despite the 20 billion pounds in corporate bonds it holds. This month they will begin to be reinvested back into greener debt.

“VALUE IN WAITING”

BoE stated that most MPC members thought there was still value in waiting to see additional inflation on near term developments in the labor market before relaxing stimulus. It is a caution against making unwise bets about tightening, which they made also in September.

The British statistics office stated earlier on Thursday that it had received survey evidence showing most workers on the furlough program of the government at the end September, and they were returning to their employers within the same hours.

MPC members who opposed a rate rise now also pointed out a slowdown in consumer demand, as well as the danger that household spending will suffer from higher inflation.

According to Reuters, economists expected a 6-3 vote to keep Bank Rate at 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.

According to Reuters, there was no significant change in bond-buying program.

As global supply chain bottlenecks continue to impede economic growth, the new forecasts from the central bank show a less optimistic picture of Britain’s future.

In the first quarter 2022, the world’s fifth largest economy saw a resurgence of its pre-pandemic size. This was later than what the BoE had predicted in August.

Britain’s 2021 expected growth rate was reduced slightly to 7.5%. The forecast for 2022 was also cut from 6% to 5%. Expected growth will slow to 1.5% and 1% respectively in 2023-2024.

After a spike in energy prices and inflation, the inflation rate rose to 5% next April. It then fell to 2%, just short of the central bank’s target of 2% at the close-of-the three year forecast period.

The projection was built on the BoE’s regular practice of using energy prices forecasted by futures market for six month’s time and assuming that prices stay the same throughout the BoE’s three year forecast period.

But, the BoE pointed out an alternate scenario. It included a drop in futures price that was priced into energy markets.

This scenario indicated that inflation would likely be “materially less” than the 2% target for the second half-year of the three-year period if interest rates rise as quickly as market expectations.

Investors were sent a message by inflation forecasts that indicated they had been over-pricing rate increases by the BoE. According to the BoE, the Bank Rate will reach 1% before the year 2022.