Bank of England Keeps Interest Rates at Record Low


The Bank of England kept interest rates at record lows on Thursday and challenged market expectations for a rate hike to combat rising inflation. But the central bank said inflation will peak at around 5 percent in April, “materially higher” than previous expectations, signaling that rate hikes may be necessary in the coming months.

If so, it will join other central banks withdraw emergency levels of monetary incentives supply chain disruptions, high energy prices and labor market scarcity are pushing prices up around the world.

The Bank of England is expected to be the first major central bank to still raise interest rates. Wednesday, Federal Reserve He said that as prices continue to rise, he will begin to end his massive bond-buying program this month and will eventually be in a position to raise rates by the middle of next year.

Like other central banks, the Bank of England has insisted that the current bout of high inflation will be “temporary”, but it’s becoming increasingly uncertain how long it will last.

“This period of high inflation will likely be temporary,” Bank of England Governor Andrew Bailey told reporters on Thursday.

He added that there is no “fixed unit of time” that defines volatility, but that it is determined by people’s reactions to high prices. The longer high inflation lasts, the greater the risk that it will translate into higher inflation expectations and higher wage demands, he said.

He added that monetary policy cannot be used to solve supply chain problems that drive inflation. That said, rate hikes will be needed to return inflation to the bank’s 2 percent target and keep expectations for the future of inflation stable.

By raising interest rates in the financial markets, investors had bet on a 15 basis point increase, or 0.15 percentage point increase, that would raise the Bank of England’s interest rate from 0.1 percent to 0.25 percent. At this week’s monetary policy meeting, two policymakers voted for such an increase – but the votes fell behind, arguing that the end of Britain’s leave program, which supports wages during the pandemic lockdowns, is no sign that labor market restrictions are eased. by the other seven members.

But Mr Bailey added that the decision was a “close call”. Three policymakers voted to immediately halt the central bank’s bond-buying program rather than let it run until its scheduled end next month.

The British pound fell after the policy announcement as traders settled on bets on a rate hike. The pound fell more than 1.3 percent against the US dollar, while the yield on 10-year government bonds fell 13 basis points to less than 1 percent for the first time since late September.

The central bank is stuck between a worsening economic growth outlook and higher prices. It lowered its projections for growth in economic output, projecting a rise of just 1 percent in the fourth quarter, half the amount forecast three months ago, and said higher prices are expected to squeeze household incomes for the next two years.

The economy is now not expected to return to pre-pandemic levels until the first quarter of next year, a quarter later than previously expected. Echo of President Christine Lagarde European Central BankThe British central bank also expects supply chain cuts to take longer than expected. The Bank of England said bottlenecks will weigh on the global economy by late 2022.

Meanwhile, the UK’s annual inflation rate was 3.1 percent in September, significantly above the central bank’s 2 percent target, and policymakers expect it to peak around 5 percent next spring.

Increases in goods and food prices are expected to keep inflation high throughout the winter. The future of wholesale energy prices, which has increased 80 percent for oil and 400 percent for natural gas since the end of last year, is “very uncertain”, the bank said.

However, the central bank predicted that inflation would fall back “materially” in the second half of next year.

The bank said it wants to wait until official data comes in on how the end of the leave program affects the labor market before making a decision on when to tighten monetary policy. According to the bank’s estimate, more than one million jobs were supported by the program when it ended in September.

The bank expects only a small rise in unemployment in the current quarter, and when the central bank meets again in mid-December, there will be updated labor market data for October, which will provide insight into what’s going on as the government stops supporting wage increases. up to 80 percent of off hours.

The unemployment rate was 4.5 percent in the three months until August. The rate is expected to be 4% by the end of next year.

In this month’s monetary policy report, the Central Bank said, “It will be necessary to increase the Bank Rate in the coming months” to bring inflation back to its previous level, “especially on the condition that the incoming labor market data are largely consistent with the central projection.” 2 percent target

The Bank of England stressed that markets are hinting that interest rates will rise to 1 percent by the end of next year. If interest rates followed this path, inflation would have fallen below the bank’s 2 percent target by the end of the 2024 forecast period. If interest rates were kept at 0.1 percent, inflation would have been 2.8 percent two years later.



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