BOE Takes Step Toward Raising Rates as Inflation Seen Spiking
The Bank of England says U.K. Inflation will spike as officials consider the need for some “modest tightening” in due course.
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The Bank of England signaled that its concerns over inflation are strong enough to warrant the withdrawal of some support to the U.K. economy over the next three years.
Policy makers led by Governor Andrew Bailey said they now expect annual price growth to peak higher than expected around 4%. While most of the increase may prove temporary, meeting the central bank’s 2% target in the medium term will require “some modest tightening,” they said.
The shift from a previous pledge to keep policy loose puts the BOE firmly among global central banks that are worried more about inflationary pressures driven by consumer demand as well as supply bottlenecks.
But U.K. policy makers were careful to signal they’re in no rush to act soon, leaving investors convinced that the first increase in interest rates will likely come in the second half of next year.
“While warning about short term inflation pressures, the Bank of England continues to be relatively relaxed,” Luke Bartholomew, senior economist at Aberdeen Standard Investments, wrote in a report.
He added that warning about future tightening is “consistent with a number of other global central banks that are preparing markets for the very gradual tapering of monetary support.”
The initial market reaction reflected that balance. U.K. 10-year bond yields were two basis points higher at 0.53%, having earlier reached 0.55%. The pound climbed 0.3% to $1.3938.
What Bloomberg Economics Says...
“The Bank of England edged a little closer toward the stimulus exit door at its August meeting. Assuming the ending of the furlough scheme doesn’t prompt an unexpectedly large rise in unemployment, the central bank is likely to start tightening in 2022.”
-Dan Hanson. For the full report, click here
BOE officials also gave more clues about their approach to removing stimulus when the time comes, saying they will start to unwind their 875 billion-pound ($1.2 trillion) quantitative easing program when the interest rate reaches 0.5%. That’s facilitated by the central bank’s decision on Thursday to embrace the possibility of sub-zero policy.
“We plan to start with a ceasing to reinvest as the gilts that we hold mature,” Bailey said in a Bloomberg Television interview, explaining the BOE’s likely tightening strategy. “We’re not going to be selling the whole stock because the level of reserves demanded by the banking system now is higher than it was pre-financial crisis.”
Investors still don’t expect the benchmark rate, currently at 0.1%, to reach the initial trigger point of 0.5% until the second half of 2023.
“Given a choice of tightening policy too early or too late, the bank currently appears far more comfortable with the latter option,” according to Hugh Gimber, global market strategist at JPMorgan Asset Management.
The BOE’s stance chimes with a global hawkish shift. In New Zealand for example, officials drew an abrupt end to their own quantitative easing program in July, and might even raise rates this month.
Meanwhile on Wednesday, U.S. Federal Reserve Vice Chairman Richard Clarida said the central bank is on course to start paring bond purchases later this year before lifting interest rates in 2023.
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