Bank of England Risks Confusing Market With Interest Rate Hike Delay
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The pound is trading at 1.3568, down 0.86% after the Bank of England passed on raising interest rates this month.
The BoE Monetary Policy Committee left the benchmark base rate unchanged at 0.1% in a decision that surprised the market which was expecting the rates lift off to begin this month.
However the MPC presumably had its forecast of 5% inflation by the second quarter of 2022 when it said rates rises would probably be required “over the coming months”
The MPC’s decision and the thinking that informed it are in sharp contrast to those the the Bank of England governor Andrew Bailey. A couple of weeks ago Bailey insisted that the MPC “will have to act” to control inflation.
UK shares greeted the news of a hold on rate rise positively, with the FTSE 100 improving 0.45% to 7281.
Expected 0.15% rise fails to materialise
Markets had pencilled in a rate rise of 0.15%, although in the foreign exchange market GBP/USD had been weakening notwithstanding a bounce yesterday.
The two-year UK government bond yield fell back 0.3% to 0.62% as rate rise expectations were repriced.
Although the MPC said that rates will have to rise next year, its hesitation in starting to lift rates increases worries that the Bank of England risks a policy misstep. Forex traders are now betting that the rise in rates to 0.25% will begin in December, but an interest rate increase might not come until February 2022.
Minority of two vote to raise interest rates
Two members of the MOC voted to raise rates in November but were outvoted.
According to the majority “there was value in waiting for more information” on the state of the labour market post furlough withdrawal and the “moderation in demand” given negative cost of living impacts on household incomes.
The MPC statement stuck to the mantra of inflation being transitory even though it expects inflation to jump to 5% next year. It thinks a number of one-off increases in areas such as commodity prices and those that are the result of supply bottlenecks, will not persist.
The policymakers remain fixated on fragilities in the recovery and worry that even a small increase in rates could undo the value of previous stimulus.
“Provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November monetary policy report, it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2 per cent target,” the MPC said in an attempt to show that it was not taking its eye off inflation.
