On Thursday, the Bank of England kept interest rates at a record low, contrary to market expectations for a rate hike to combat rising inflation. But the central bank said inflation would peak at around 5 percent in April, “substantially higher” than its previous expectations, and made it clear that rate hikes are likely to be needed in the coming months.
If so, it will join other central banks in ditching extreme levels of monetary stimulus as supply chain disruptions, rising energy prices, and labor shortages push prices up around the world.
The Bank of England is expected to be the first major central bank to raise rates. On Wednesday, the Federal Reserve said it will begin scaling back its huge bond buying program this month as prices continue to rise, eventually allowing it to raise rates in the middle of next year.
Like other central banks, the Bank of England insists that the current surge in high inflation will be “temporary,” but it is increasingly unclear how long it will last.
Investors were targeting an increase of 15 basis points, or 0.15 percentage points, which would drive interest rates down from 0.1 percent to 0.25 percent. At a monetary policy meeting this week, two senior politicians voted in favor of such a raise, arguing that there is no indication that the end of the UK layoff program, which supported wages during the pandemic lockdown, eased labor market restrictions, but they were seven other members voted. Three voted to immediately end the central bank’s bond-buying program, rather than letting it run until its scheduled completion next month.
The central bank is stuck between deteriorating growth prospects and higher prices. He downgraded his forecasts for economic output growth, projecting only 1 percent growth in the fourth quarter, half of what was forecast three months ago, and said higher prices are expected to reduce household incomes over the next two years.
The economy is expected to return to its pre-pandemic level at the earliest in the first quarter of next year, a quarter later than previously expected. Echoing the head of the European Central Bank, Christine Lagarde, the British central bank also expects supply chain disruptions to last longer than expected. The Bank of England said bottlenecks will weigh on the global economy until the end of 2022.
On the other hand, the UK’s annual inflation rate was 3.1 percent in September, well above the central bank’s 2 percent target, and policymakers expect it to peak around 5 percent next spring. Last month, Andrew Bailey, governor of the central bank, said inflation above the target is worrisome and that policymakers will need to ensure that it does not become constant.
Rising commodity and food prices are expected to keep inflation high throughout the winter. And the future of wholesale energy prices was “very uncertain,” as they had already risen 80 percent for oil and 400 percent for natural gas since the end of last year, the bank said.
Nonetheless, the central bank predicts that inflation will decline “substantially” in the second half of next year.
The central bank said it would like to wait until official figures emerge on how the end of the vacation program affected the labor market before deciding when to tighten monetary policy. The bank estimates that by the time the program ended in September, the program had supported just over a million jobs.
The bank expects only a modest increase in unemployment in the current quarter, and by the time the central bank meets again in mid-December, there will be an October labor market update giving an idea of what happened when the government stopped supporting wage growth. up to 80 percent of hours not worked.
The unemployment rate in the three months to August was 4.5 percent. By the end of next year forecasted at 4 percent.
“Provided that the incoming data, especially for the labor market, were broadly in line with the central forecast in this month’s monetary policy report, the central bank said it would“ need to raise the bank rate in the coming months ”to bring inflation back to previous level. his target is 2 percent.
The Bank of England stressed that the markets expected interest rates to rise to around 1 percent by the end of next year. And if interest rates had followed that trajectory, inflation would have fallen below the bank’s 2 percent target by the end of the central bank’s forecast period in 2024. If interest rates were held at 0.1 percent, inflation in two years would be 2.8 percent. …
