Bank of England: Moving towards tighter policy settings

The MPC voted unanimously to keep rates where they are, but only voted 7-2 to continue with their existing programme of asset purchases (despite the fact it is set to end around the turn of the year anyway). The two members (Ramsden and Saunders) preferred to end the asset purchase scheme “as soon as practical” after the meeting.

Edging closer to tightening policy: The key sentence in italics below: “At its previous meeting, the Committee judged that, should the economy evolve broadly in line with the central projections in the August Monetary Policy Report, some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term. Some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain”.

Previous guidance “no longer useful”: The previous form of guidance stated that they did not intend to tighten policy until there was “clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target sustainably” and despite there still being a split on the MPC about whether the condition had been met, “all members agreed that the previous formal guidance was no longer useful in the present situation”.

More pessimistic on near-term growth…: Since the August meeting, staff have revised down their expectation for UK GDP growth in Q3 by ~1pp (to a still substantial 2.1%Q), reflecting supply constraints on output, and GDP growth in June and July had been less than they had anticipated. On supply constraints: “Intelligence from the Bank’s Agents suggested that, against a backdrop of strong demand, it might take some quarters for supply issues to be resolved in some cases. Separately, recent high spot wholesale gas prices had significantly affected the production plans of some sectors”.

…but more worried on inflation…: Since the August meeting, they note signs that cost pressures may prove more persistent and note some signs of rising inflation expectations. They expect CPI to rise to “slightly above 4%” in Q4 (a bit more than they’d expected in August).

…and more confused about underlying labour market slack: They comment that uncertainty around the outlook for the labour market has increased. Numbers using the furlough scheme were higher than they’d expected over the summer but with few signs of an increase in redundancies and a high stock of vacancies. There was a range of views on the likely path for unemployment, but they seemed to agree that there was a “high option value” in waiting for more information following the end of the furlough scheme this month.

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