The Bank of England circumvented expectations today and announced at midday that it was holding the base rate at 0.1%.
The move was something of a shock, given that many had predicted that the central bank would move to tackle rising inflation. In the same breath, the bank announced that it was predicting inflation of 5% in the near future, a percentage point higher than many have thought and 2.5 times higher what is considered optimal.
In an accompanying statement, the Bank said: “We expect inflation to rise further to around 5% in the spring next year. After that, we expect inflation to fall. One reason for that is that we think the impact of higher oil and gas prices will fade. We also don’t think that the demand for goods will continue to rise as fast. And we expect that some of the production difficulties businesses are facing will ease. We expect inflation will be close to our target in around two years’ time.”
The Monetary Policy Committee voted 7-2 to leave rates unchanged, also opting to maintain its current quantitative easing programme.
The right choice
Sarah Giarrusso, investment strategist at Tilney Smith & Williamson, described the move “as a surprise to some given the recent hawkish comments from MPS members and aggressive moves of the market pricing of interest rates”.
But Ivan Petrella, professor of economic policy and forecasting at Warwick Business School said it was “the right choice”.
“Inflation has been rising over the recent months and it is clearly heading up, but looking beyond the aggregate numbers shows that most of the recent rise in price reflect global supply shortages and bottlenecks.
“This is a classic ‘cost-push’ inflation which will compress spending, in particular for the lower income earner that are more exposed to fuel and energy price increases. As price pressures are temporary and with the economic data already showing a slowdown in aggreagate activity, not rising interest rate at this time is clearly a wise move.”
The Bank’s Monetary Policy Report for November 2021 was coy about the future. It said in part: “There is a high level of uncertainty around the outlook, including for energy prices. The futures curves for energy prices are downward sloping, in contrast to the MPC’s central conditioning assumptions in which prices remain flat after six months.”
It added: “In an alternative scenario that is conditioned on energy prices following their futures curves throughout the forecast period, and the market-implied path for Bank Rate, CPI inflation falls back towards the target more rapidly than in the MPC’s central projection, and is materially lower over the second half of the forecast period. While the risks around energy prices are judged to be to the downside, those to wage growth are judged to be skewed to the upside.”