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Wait and see

‘We didn’t bottle interest rate hike’ says governor

Bank of England

Rate-setters at the Bank of England are giving the economy more time (pic: Terry Murden)

UPDATE 5 NOVEMBER: The Governor of the Bank of England Andrew Bailey has rejected claims that he talked up an interest rate rise, then failed to follow through.

Mr Bailey denied the Bank of England “bottled it” yesterday, adding: “We expect interest rates to rise and we are very clear”.

The Bank defied expectations of a rise in the interest rate by voting to leave it unchanged at its record low of 0.1% to give the economy more time to recover.

Speaking on radio on Friday morning, he said: “We have to occasionally make quite direct comments on what we think will happen.

“If you ask the question ‘why haven’t you done it now?’ The answer is all to do with the labour market… there were a lot more people using the furlough scheme right up to the end.

“The labour market looks tight in this country at the moment but the missing piece of evidence is just what has happened after the end of the furlough scheme and we don’t have any data to guide us on that.”

He said the Bank will look at unemployment and wage rates once the data is available.

It will also see through the final leg of its QE programme, taking its total stock of assets to £895bn by the end of the year.

However, the Bank warned that inflation will probably peak at 5% in April next year and stay above its 2% target for two years, leaving markets to conclude that rate rises are on the horizon.

It said that it “judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the two per cent inflation target sustainably in the medium term.”

Two of the nine member monetary policy committee voted for an immediate rise in the bank rate to 0.25%, and three members voted to end QE immediately, up from two in September’s meeting.

The Bank revised down its forecasts for economic growth. It now expects the UK economy to reach pre-Covid levels by the first quarter of next year, as opposed to the final quarter of this year.

In early afternoon trade the FTSE 100 was 28 points higher at 7,277.01. Sterling fell to a one-month low of $1.355.

Martin Beck, senior economic advisor to the EY ITEM Club, said: “The committee’s language implied that higher borrowing costs are coming soon.

“Subject to the economy performing in line with its forecasts, today’s policy statement said that ‘it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”

Giles Coghlan, chief currency analyst at HYCM, said: “Evidently, the Bank of England is wanting more time before taking such action.

“There is logic to this — inflation might be rising, but the Bank of England is right not to consider an interest rates hike as a silver bullet to this problem.

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“Raising rates right now would risk harming businesses’ recoveries and would also discourage people to spend their pent-up savings.

“All of this would damage the UK economy’s post-pandemic recovery and could result in ‘stagflation’, where inflation rises but the economy stagnates.”

Laith Khalaf, head of investment analysis at AJ Bell, said: “This was also the first interest rate committee meeting since the furlough scheme ended, so the Bank may well want to see how the jobs market looks.”

Luke Bartholomew, senior economist at abrdn, said: “The decision to keep rates on hold today will certainly surprise some investors as the Bank has done little to push back on mounting speculation about an imminent hike.

“We expect a hike in rates to come through in December, when policy makers will have at least some tentative evidence on how employment has performed after the expiration of furlough.

“And indeed further rate increases next year. So the message to investors is that rate hikes are coming soon, but not to hang too closely to every speech and interview by rate setters.”

Daniele Antonucci, chief economist & macro strategist at Quintet Private Bank – parent company of Brown Shipley – said: “Ahead of the meeting, the market looked for the Bank Rate to rise to 1.25% by end-2022 followed by 40 bps in cuts from mid-2023 to end-2025. In essence, the market seemed to expect a ‘policy error’ that the Bank would be forced to reverse at some point, a scenario we don’t find convincing.

“We project more moderate increases to 0.75% by the end of next year, as we think the near-term outlook is more challenging.”

Shares in house builders rose after the Bank of England’s monetary policy committee held interest rates (see below) at 0.1%.  

Taylor Wimpey was up 2.22%, Persimmon added 1.76% and Barratt Developments rose 1.93%.

But banks were lower and left frustrated at the loss of potential income.

NatWest was looking at a £450m addition to income from a 25 basis points rise. In the event, the bank’s shares fell 5.6% as the low interest rate continued to squeeze bank margins. Lloyds was 4.5% lower and Barclays 3.9%



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