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Our views 04 November 2021

Bank of England: On hold, but not for long

5 min read

The Bank of England (BoE) decided to keep rates on hold at today’s meeting. However, they signalled a rate rise in coming months.

“The Committee judges that, provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November Monetary Policy Report, it will be necessary over coming months to increase Bank Rate in order to return Consumer Price Index (CPI) inflation sustainably to the 2% target.” [my italics]

That sounds consistent with expecting a rate rise in February 2022, with some probability of December 2021. Governor Bailey offered only limited clarification on the timing in the press conference saying that in the coming months, there will be “several meetings”.

However, the forecasts and commentary also confirm that it doesn’t make sense at this stage to expect a rate rise in coming months to mark the start of any rapid tightening of monetary policy.

A December rate rise is a possibility, but data (especially on the labour market) will be much clearer by February

According to the minutes, “Importantly, and as had been signalled previously, there was value in waiting for additional information on near-term developments in the labour market, including official data relating to the period following the end of the Coronavirus Job Retention Scheme (CJRS), before deciding when a tightening in monetary policy might be warranted”. However, in the press conference, Governor Bailey also pointed out that there would be two labour market releases before their next meeting (on 16 December).

Raising rates in February rather than today also means households will be better prepared for such a rate rise after the relatively clear signalling today.

7-2 versus ‘close call’

The vote to keep rates on hold was 7-2 (Ramsden and Saunders voting to raise rates). I would have expected the vote to be closer given recent BoE communication and for the overall tone to sound a little more worried around the potential for higher inflation expectations. Governor Bailey did, however, say in the press conference that today’s decision was a “close call”.

The decision to continue quantitative easing is in line with previous Bank of England plans. However, three members of the Monetary Policy Committee (MPC) (Saunders, Ramsden and Mann) voted to cut the asset purchase target at this meeting (i.e. end asset purchases now rather than in December).

The BoE’s forecasts signal that they think markets had priced in too much too soon in terms of rate rises

The MPC’s forecasts for inflation are conditioned on a path for interest rates that reaches 1% by the end of 2022 already. They expect inflation to be below the target at the end of the forecast period (lower in their alternative scenario where energy prices follow forward curves throughout the forecast period). That therefore can be read as a bit of pushback against pre-meeting market pricing. Importantly, they also explicitly state that inflation “would probably fall a little further beyond that point, given the margin of spare capacity that is expected to emerge”.

In their central case, they expect GDP to reach its pre-pandemic Q4 2022 level in Q1 2022, but by the end of their forecast horizon expect some spare capacity to have opened up again. It was striking just how weak their central case medium-term GDP forecasts now are, at only 0.9%Y in Q4 2024 for example and with the unemployment rate rising at that point too. Their forecast profile now looks a bit overly pessimistic for GDP growth in particular by the end of their forecast horizon, in my view. Governor Bailey’s opening comments in the press conference also included, on interest rates that “I would caution against views on the scale of an increase that would be likely to push inflation below target in future by increasing slack in the economy.” [my italics]

They expect CPI inflation to peak at around 5%Y in April 2022, well above their 2% target, when Ofgem are expected to raise their energy price cap again given what has been happening to wholesale gas prices. That is a sizeable upward revision compared to their last set of forecasts. However, they then expect CPI inflation to “fall back materially”. 

‘Low for longer’ is still relevant in their view

On the bigger picture around where interest rates may get to, it was also interesting in the press conference that they said they haven’t seen anything yet that would lead them to change their view on equilibrium rates – i.e. that these remain low relative to history.

My central case

My central case is for a first post-pandemic rate rise in February (of 15bp). Their framework and general messaging, at this stage look more consistent with a spread out, gradual profile for interest rates rather than anything particularly front-loaded. I would now pencil in a 25bp rate increase in for end-2022, then roughly 25bp a year. However, there are still very plausible alternative scenarios, including ones where higher inflation expectations and so-called second round effects become much more of a concern and require stronger and quick rate increases from the Bank.


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