— Governor Andrew Bailey tees up rate rise ‘in months to come’
LONDON (MaceNews) — The Bank of England defied market expectations, leaving its main interest rate at a record-low of 0.1%, but Governor Andrew Bailey warned Thursday of a rate increase over the short-to-medium term.
“It will be necessary to increase bank rate in coming months,” Bailey told reporters after release of minutes of the Monetary Policy Committee meeting, adding that, “in the coming months means from now onwards.”
Bailey voted with the majority of members in keeping rates on hold, while Deputy Governor Dave Ramsden and external member Michael Saunders favoured an immediate increase to 0.25%.
The announcement caught the markets by surprise, as Bailey warned just weeks ago that the Bank would “have to act” to contain inflation. The UK consumer price index rose by an annual rate of 3.2% in August before slipping to 3.1% in September, well above the BoE’s 2.0% target.
BOE staff believe inflation rose to nearly 4% in October, with CPI “expected to peak at around 5% in April 2022, materially higher than expected in August,” according to the Bank’s quarterly Monetary Policy Report, also published on Thursday. October inflation data are slated for release on 17 November.
Governor Bailey faced a grilling from reporters over the seemingly mixed messaging and admitted that the rate decision “was a very close call.”
The MPC also agreed to maintain the current quantitative easing package at £875 billion, with Ramsden and Saunders joining with Catherine Mann to vote for a reduction to £855 billion. Mann’s dissent came as a surprise, as she has recently struck a more dovish tone, noting that the latest increase in gilt yields have already tightened financial conditions.
Bank of England staff also reduced the outlook for fourth quarter growth, with the economy expected to expand by just 1.0% in the final three months of the year, down from the 2% expansion forecast in August. “While supply constraints are the main cause of the revision to UK GDP in Q4, consumer demand is expected to be weaker as well,” according to the Monetary Policy Report.
The decision knocked sterling, which slumped by more than 1% after the announcement, falling to $1.3516 a short time ago. But economists believe that the Bank is likely to lift rates at the next MPC meeting on 15 December, by which time the BoE will have viewed labour data after the end of the UK job furlough scheme on 30 September. “There is value in waiting for additional information on near-term developments in the labour market,” said Bailey.