RE: Bank of England backs off from immediate interest rate rise5 Nov 2021 07:45
Morning Falky,
The Bank of England has backed away from an immediate rise in interest rates, leaving the central bank’s benchmark at the historic low of 0.1 per cent even as it published its highest inflation forecast for a decade. Predicting inflation would reach 5 per cent next spring, the BoE’s Monetary Policy Committee on Thursday said it was likely that rate rises would be needed “over coming months”.
But the level of urgency on tackling inflation was pared back compared with BoE governor Andrew Bailey’s comments last month that the MPC “will have to act” to restrain rising prices.
The decision to keep interest rates on hold confounded financial markets which were convinced the BoE was poised to tighten monetary policy, to 0.25 per cent, for the first time since 2018.
Sterling fell 1.5 per cent to $1.352 after the announcement, its weakest level against the US dollar in five weeks. Short-term UK government staged its biggest one-day rally since March last year, pushing the two-year bond yield 0.21 percentage points lower to 0.48 per cent.
The MPC attempted to quell market disquiet with signals that it would still need to increase interest rates to tame inflation.
Ben Broadbent, BoE deputy governor for monetary policy, said rates “were unlikely to stay constant” at 0.1 per cent because that would imply inflation would not get back to the central bank’s 2 per cent target until 2025 at the earliest.
But Bailey was reluctant to be drawn on when it would take action. Asked to define the phrase “over coming months”, the governor said there were “several [MPC] meetings over the coming months”.
Bailey also suggested the BoE would not raise rates to 1 per cent by the end of 2022, as expected by markets, because the central bank’s forecasts showed inflation would fall below its 2 per cent target in the medium term if they tightened monetary policy that much.
“It’s been a chastening day for the market,” said Moyeen Islam, a Barclays rate strategist. “The governor made it clear in his press conference that he hadn’t made any promises in the run-up to the [November] meeting, but investors certainly didn’t see it that way. The issue now becomes a degree of wariness about the Bank of England’s communications.”
The MPC’s decisions were not unanimous. Two of the nine MPC members voted for an immediate rate rise to 0.25 per cent and three wanted the central bank to end its quantitative easing programme of asset purchases now.
Bailey said the rate decision for him had been “a very close call”.
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