Inflation to hit 4%
Interest rate rise pencilled in for February
The Bank of England predicts 4% inflation this year (pic: Terry Murden)
Interest rates could rise sooner than expected following expectations from the Bank of England that inflation could hit 4% by the end of this year.
Its monetary policy committee (MPC) decided to keep the base rate at 0.1% but Governor Andrew Bailey said the case for an increase “appeared to have strengthened” .
The bank expects the overshoot in inflation to be temporary, but two policymakers on the MPC called for an immediate halt to the bank’s £895bn bond purchase programme, which is due to run until the end of the year.
Sterling rose by almost a cent against the US dollar and two-year British government bond yields surged by their most since March 2020 as traders bet on an earlier rate rise by the BoE, which would be the first major central bank to hike since the pandemic took hold.
The US Federal Reserve said on Wednesday that it could start to slow its asset purchase programme as soon as November, and earlier yesterday Norway’s central bank raised rates.
The markets began pricing in a 90% chance that the Bank of England would raise rates by February. Citi and JP Morgan brought forward their forecasts for a first rate rise to 0.25% to the first quarter of 2022.
Soaring energy prices and hold-ups in supply chains are pushing up prices around the world.
The nine-member MPC – which included new members Huw Pill and Catherine Mann – voted unanimously for no change to interest rates.
But deputy governor Dave Ramsden joined external member Michael Saunders in voting to cap government bond purchases at £840bn.
However, the committee felt there was a need for caution as the government prepares to unwind the job furlough programme for than a million workers at the end of this month with uncertainty over how this will impact on unemployment.
Mr Bailey, who has to inform the Chancellor why inflation is above its 2% target, said the case for a rate rise had risen since August.
“Some developments during the intervening period appeared to have strengthened that case, although considerable uncertainties remained,” he said.
Luke Bartholomew, senior economist at Aberdeen Standard Investments, said: “The most striking message in the Bank’s statement today was that it believes the case for tightening monetary policy has strengthened since August. This is despite the fact that the Bank also downgraded its growth forecasts.
“It therefore seems clear that it is becoming more concerned about the inflation outlook, even if most of the forces currently buffeting the economy and pushing prices higher are likely to be temporary.
“The looming end of furlough is a major source of uncertainty facing the economy, but for now the Bank appears relatively confident that the economy can deal with this shock without a large increase in unemployment.
“As such, investors should prepare for the prospect of interest rates increasing next year, making the UK standout somewhat compared to other major economies where rates are likely to remain unchanged through next year.”