William Schomberg

LONDON (Reuters – Thursday’s Bank of England policy decision will be the most anticipated in many years. The Bank will decide whether to raise borrowing costs at an all time low, or to wait for the recovery of the post-lockdown economy before making a move.

The announcement by the British central banks is scheduled for 1200 GMT.

The increase in the Bank Rate from 0.1% to 0.2% has been fully anticipated by investors. This would make the BoE one of the largest central banks in the world to raise rates for the first time since the outbreak. The economists, however, are less confident.

The Federal Reserve stated Wednesday that they would begin to reduce their bond-buying program this month. It is the first step in a U.S. rate rise not expected before mid-2022.

Christine Lagarde (CEB President) stated that the ECB is unlikely to raise interest rates next year.

Investments and economists that closely monitor the BoE tend to be more split than those who follow it.

A Reuters poll released last week indicated that the majority of analysts believe the BoE will keep rates steady, but many others feel the call is too close.

Ana Boata is the head of Euler Hermes’ economic research, which is part of Allianz. (DE:). She said that the BoE faces the opposite challenges of inflation exceeding 2% and tightening household spending, as the government reduces stimulus and increases taxes.

Britain’s economy faces additional risks after Brexit due to trade frictions, and the recent increase in COVID-19.

In a quarterly update, the BoE could reduce its forecast of next year’s growth.

POLICY DILEMMA

Boata explained that the BoE could create more inflation if it does not act.

“However, initiating a earlier monetary tightening cycle could be premature, and may raise the chances of a technical downturn, in particular as the UK is the first major country to initiate fiscal consolidation in 2022.”

Andrew Bailey, BoE Governor, has spoken out about the necessity to reduce inflation expectations. Three more policymakers from the bank have also voiced concerns.

Two other experts disagree and say that raising interest rates would not address the primary driver of inflation, the abrupt reopening global economy which has created supply bottlenecks as well as increased prices.

The meeting’s outcome is uncertain as the three remaining MPC members haven’t made any public comments for many weeks.

Also, the BoE will announce whether or not it will permit its bond-buying program of 895 billion pounds ($1.22 Trillion) to be completed as scheduled.

Two MPC members voted in September to end the purchase of early due to signs that the economy was quickly recovering from the near 10% coronavirus-induced crash.

Bailey and his coworkers have stated that it’s possible to raise rates, while still allowing quantitative easing (QE), to continue its course.

Bailey will be leading a 1230 GMT news conference where he might have to address awkward questions.

According to Allan Monks of JP Morgan economist, “The BoE faces a challenge explaining how its decisions on QE/rates have been consistent with the current macro background and its recent communications”,

Although economists disagree on the possibility of a rate rise on Thursday, there is more agreement among them that the BoE would like to discourage investors from placing bets on rates rising steadily through 2022 and reaching about 1.25% at the end next year.

According to current market pricing, the BoE could choose to forecast a decline in inflation of less than 2% over two or three years.

($1 = 0.7321 pounds)