Bank of England keeps rates on hold and revises up economic forecasts

The Bank of England revised up its economic forecasts on Thursday, rendering the possibility that it will set a negative interest rate this year as a remote prospect after its Monetary Policy Committee meeting.

Voting unanimously to hold interest rates at the historic low of 0.1 per cent there was a surprise dissent from chief economist Andy Haldane in the total amount of quantitative easing he preferred.

While eight of the nine committee members voted to maintain the stock of money to be created in order to buy assets at £895bn by the end of this year, he preferred to limit the size to £845bn.

The committee revised up its 2021 economic growth forecast to 7.25 per cent in the May monetary policy report, from 5 per cent in its predictions three months ago.

Some of this more rapid recovery was likely to lead to a slower expansion in 2022, the MPC said, revising down its expectation of growth next year to 5.75 per cent from 7.25 per cent in the February forecasts.

Inflation would stay under control even with the better outlook, the bank said, partly because it based its new forecasts on market expectations that it would raise interest rates earlier, damping the bounce back in economic activity.

It did say that inflation towards the end of this year would rise to 2.5 per cent, but would then fall back to the BoE’s 2 per cent target by the end of 2022.

In February, the forecasts were based on an assumption that interest rates would need to be set at negative rates for the first time this year and would still be zero per cent after three years to stop inflation falling persistently below the BoE’s 2 per cent target.

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Since then, financial markets have bet on much tighter monetary policy being needed for stable inflation with the latest forecasts based on an assumption that interest rates begin to rise in 2022 and increase to 0.65 per cent in three years’ time.

The improvement in the growth forecasts with stable inflation validated the hawkish change in view from financial markets.

The MPC, however, reiterated that it intended to wait until it was certain that inflationary pressures were real and the 2 per cent target would be met “sustainably” before it began to tighten policy.

The BoE considers the pace at which it operates the quantitative easing process of creating £895bn to purchase mostly government bonds as an operational matter.

It had planned to purchase £150bn of assets in 2021 and by the end of April had bought £67bn. The bank said that, while it was ahead of target for the year, “the pace of these continuing purchases could now be slowed somewhat”.

“This operational decision should not be interpreted as a change in the stance of monetary policy,” it added, although markets are likely to interpret the move as hawkish.



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