The Bank of England has voted to keep interest rates on hold, dashing investors’ expectations of a hike that would have made the UK the first of the world’s major economies to take action against inflation as the pandemic eases.
The BoE kept alive the prospect of tighter monetary policy soon, saying it would probably have to raise interest rates from its all-time low of 0.1 per cent ‘over coming months’ if the economy performed as expected.
But seven of its nine policymakers voted to hold off a rate rise for now so they could see the how many people became unemployed following the recent end of the Government’s job-protecting furlough scheme.
Decison made: Andrew Bailey and the MPC Committee voted to keep interest rates on hold
Only two members of the Monetary Policy Committee, namely Deputy Governor Dave Ramsden and Michael Saunders, voted for an immediate 15 basis-point rate hike.
Mortgage-holders had been bracing themselves for a rise in interest rates, with some big-name banks and building societies already upping rates on their mortgage deals.
Today’s decision, however, spells more bad news for savers with money stashed away in accounts with dismally low savings rates rapidly being eaten by inflation.
While the headline measure of consumer price inflation dipped slightly in September to 3.1 per cent, it remains more than a percentage point above the Bank of England’s Government-mandated target of 2 per cent.
The BoE said the MPC voted 6-3 in favour of allowing its government bond-buying programme to reach its full size of £875billion.
Catherine Mann joined Ramsden and Saunders to scale back that part of the BoE’s stimulus programme.
Including its £20billion of corporate bond holdings, which this month will start to be reinvested in greener debt, the total asset purchase target remained at £895billion pounds.
The BoE’s cautious approach to interest rates comes a day after the US Federal Reserve said it would start scaling back its bond-buying programme this month, a precursor to its first rate increase which investors expect in mid-2022.
The European Central Bank has been more explicit about its determination to keep stimulus flowing into the euro zone economy. Its President Christine Lagarde said on Wednesday that the ECB was very unlikely to raise rates next year.
‘Value in waiting’
The BoE said most MPC members still thought ‘there was value in waiting for additional inflation on near-term developments in the labour market’ before deciding to ease off on stimulus – a warning against premature bets on tightening that they also made in September.
Vote: The BoE said the MPC voted 6-3 in favour of allowing its government bond-buying programme to reach its full size of £875bn
Earlier today, Britain’s statistics office said survey evidence showed most workers who were still on the Government’s furlough programme when it closed at the end of September had returned to their employers on the same hours.
The MPC members who voted against a rate hike now also noted a recent slowdown in consumer demand as well as the risk that higher inflation hits spending by households.
The BoE’s new forecasts showed a weaker picture for Britain’s economic growth as the bottlenecks that have weighed on global supply chains continued in the near term.
The world’s fifth-biggest economy was seen regaining its pre-pandemic size in the first quarter of 2022, later than the BoE’s projection made in August of the last three months of this year.
Britain’s expected economic growth rate in 2021 was trimmed slightly to 7 per cent and the forecast for 2022 was cut to 5 per cent from a previous projection of 6 per cent. Growth is expected to slow sharply to 1.5 per cent in 2023 and 1 per cent in 2024.
Inflation could rise to around 5 per cent in April next year, driven up mostly by the surge in global energy prices, before falling back to just below the BoE’s 2 per cent target at the end of its three-year forecast period.
That projection was based on the central bank’s usual practice of taking energy prices predicted by futures markets for six months’ time, and assuming that prices then stay unchanged for the remainder of the BoE’s three-year forecast period.
However, the BoE drew attention to an alternative scenario, which included the drop-off in futures prices that has been priced into energy markets.
The inflation forecasts appeared to send a signal to investors that they have been pricing in too many rate hikes by the BoE. The interest rate pricing used by the BoE show Bank Rate hitting 1 per cent by the end of next year.
Jeremy Leaf, north London estate agent and a former RICS residential chairman, said: ‘Although a rise in interest rates would have had a modest impact as only a small proportion of borrowers are on variable-rate deals, the consequences for the housing market could have been much more significant.
More of the same: The BoE has voted to keep interest rates at a record low of 0.1% today
‘Activity and price growth has been slowing since government support schemes started winding down.
‘An interest rate rise would compromise confidence for some, particularly first-time buyers on tight budgets concerned about the future direction of travel of rates. As the housing market is built on confidence, a rate rise, and perhaps two or three more to follow, would inevitably have an impact on activity.’
Neil Wilson, chief markets analyst at Markets.com, said: ‘The Bank of England delivered a surprise by not raising rates, sending gilts and sterling into a bit of a spin.
‘It’s really one of those moments where you have to question the communication strategy of the BoE. It had multiple occasions on which it could have gently nudged against the growing market anticipation around the November meeting being live but chose not to, and appeared to actively encourage tightening bets.
‘Credibility is at stake, Mr Bailey. I’d said a hike was no slam dunk due to the way certain MPC members were leaning, but Bailey has been cheerleading tighter policy and didn’t vote for it himself – which suggests either he’s bad at communicating his views or there were simply not enough votes for him so he refrained from being a minority voter.’
Ed Monk, associate director at Fidelity International, said: ‘It seems inevitable that the Bank of England will raise rates at some stage but borrowers have been given a reprieve for now.
‘The MPC appears in wait-and-see mode while supply chain issues and higher global energy prices – factors beyond the control of the Bank – push inflation higher.
‘A delay in raising rates is a signal of the conundrum facing rate-setters. They will be uncomfortable that inflation is running so far above target, but also understand they have limited options to bring price rises down. Maintaining rates at their current emergency low level underlines that the Bank still views growth as being fragile.
‘Households need to ready themselves for higher borrowing costs arriving at some stage.
‘Taken alongside rising inflation of prices for everyday items like fuel and energy, and with higher National Insurance and frozen Income Tax rates on the way, household budgets are being chipped away from multiple directions.
‘The financial cost of a rise in rates to 0.25%, whenever that does arrive, may be limited but the shift in consumer sentiment it causes may be much bigger.’