The bank “is now in wait-and-see mode” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management. “[It is] still providing a signal that tightening will be required in the coming quarters to keep inflation in check, but holding off any immediate action as it assesses near-term developments around Covid, the ending of furlough, and the persistence of supply-side disruptions including the recent spike in gas prices”.
The MPC also voted by a majority of 7-2 for the BoE to continue its existing programme of UK government bond purchases.
The adjustment of the bank’s forecasts increased the CPI inflation projection to over 4% in Q4 2021, due to the rise in energy prices and supply chain issues, though in the medium-term is expected to fall back to close to the 2% target. It also reported that core inflation rose to 3.1% in August, its highest rate since November 2011.
“Against a backdrop of robust goods demand and continuing supply constraints, global inflationary pressures have remained strong and there are some signs that cost pressures may prove more persistent. Some financial market indicators of inflation expectations have risen somewhat, including in the United Kingdom,” the MPC report said. “Indicators of households’ medium-term inflation expectations have increased in recent months, with the Citi/YouGov five-to-ten year ahead measure at its highest level since 2013 in September.”
The bank is clearly concerned about inflation as “it believes the case for tightening monetary policy has strengthened since August,” even though the bank downgraded its growth forecasts, according to Luke Bartholomew, senior economist at Aberdeen Standard Investments. Expectations for Q3 GDP growth were downgraded to 2.1%, down from 2.9% in August.
Analysts are conflicted as to whether the BoE is acting too slowly and worsening inflationary pressures. Hinesh Patel, portfolio manager at Quilter Investors, said that the BoE “should be well within its rights to start tightening its stimulus policy”. Rachel Winter, associate investment director at Killik & Co, added that “low rates are likely to continue stoking the UK’s rising inflation rate”.
However, others caution against the bank acting too soon, as there is major uncertainty around the economic effects of the end of furlough and continuing supply chain issues.
Most agree that “investors should prepare for the prospect of interest rates increasing next year,” said Bartholomew. Richard Carter, head of fixed interest research at Quilter Cheviot, added that “small and limited interest rate hikes next year remain a possibility”.