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Rising inflation puts Bank of England on the spot

Thu, 24th Jun 2021 00:01

* BoE expected to keep stimulus unchanged

* Investors await central bank's assessment of inflation
risks

* BoE has said jump in price growth likely to be transitory

* MPC's Haldane likely to vote again to cut bond-buying plan

* Will any other MPC member also dissent?

By William Schomberg

LONDON, June 24 (Reuters) - The Bank of England will say on
Thursday whether it is worried about a recent jump in inflation,
which broke above the central bank's 2% target and looks set to
climb higher as Britain reawakens its economy from its
coronavirus slumber.

With global policymakers grappling with economic overheating
risks against the backdrop of huge stimulus programmes, Governor
Andrew Bailey and other BoE officials have mostly said Britain's
faster price growth is likely to prove transitory.

But last week, the U.S. Federal Reserve began to move
towards reducing its pandemic stimulus by signalling its first
rate hike in 2023, a year earlier than previous projections,
putting the focus on what other central banks might now do.

The BoE is expected to leave its benchmark rate at an
all-time low of 0.1% and press on with its 895 billion-pound
($1.25 trillion) bond-buying programme when it announces its
June policy decision at 1100 GMT.

But investors are watching to see if any other Monetary
Policy Committee members join Chief Economist Andy Haldane who
is likely to vote again to scale back the bond-buying programme
at his final meeting before leaving the BoE.

With the world's fifth-largest economy bouncing back sharply
from its near 10% plunge last year, Haldane has said the British
central bank is facing its most dangerous policy challenge in
almost 30 years.

Consumer price inflation jumped to 2.1% in May, a long way
below the U.S. rate of 5% but surpassing the BoE's 2% target
level sooner than the central bank had forecast.

Last month, it projected that CPI would hit 2.5% in late
2021 before easing back to 2%. But some economists are now
pencilling in a peak of just over 3%.

On Wednesday, a survey of businesses showed cost pressures
at their highest levels since the 1990s.

Hugh Gimber, global market strategist at J.P. Morgan Asset
Management, said some MPC members other than Haldane might feel
that the time to act was approaching.

"Last week the Fed took its first step in guiding investors
towards less easy policy ahead. The Bank of England may not be
far behind," Gimber said.

Interest rate futures on Wednesday priced in a rise in Bank
Rate to 0.25% from its current 0.1% by the summer of 2022.

RISKS REMAIN

While Bailey and other MPC colleagues say they are watching
inflation closely, they also worry about a possible rise in
unemployment when the government asks employers to contribute to
the cost of keeping on furloughed workers from July 1.

The furlough scheme is due to end altogether at the end of
September.

Evercore, a consultancy, said the BoE's assumptions for how
many furloughed workers were likely to go back to their old jobs
looked too optimistic, meaning it was expecting a first Bank
Rate hike only in late 2022.

"But if the furlough phase-out goes better than we
anticipate, the Bank could certainly be hiking as early as May
2022," it said in a note to clients.

The BoE must also monitor a new rise in COVID-19 cases in
Britain which on Wednesday hit their highest since February. A
planned easing of social-distancing rules due this week was
delayed by a month as the government delivers more vaccines to
younger people.
($1 = 0.7164 pounds)
(Writing by William Schomberg; Editing by Angus MacSwan)

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