The Bank of England unexpectedly left interest rates unchanged on Thursday, putting the response to slowing economic growth in a more important position than inflation, but the credibility of the central bank has also been questioned.
The Bank of England policymakers led by Governor Andrew Bailey voted 7-2 to keep the benchmark lending rate unchanged at 0.1%.
This decision shocked traders, who sharply lowered their interest rate hike expectations, causing the pound to plummet 1.3% against the dollar. British government bonds rose, and the yield on 5-year government bonds was the biggest drop since the Brexit referendum.
Although Bailey said that soaring inflation means that “borrowing costs” will rise in the next few months, he refuted the market’s expectation that monetary policy will be substantially tightened. To defend his decision, he claimed to focus on the job market and expressed concerns similar to those of the Fed. Federal Reserve Chairman Jerome Powell said on Wednesday that he would not support rate hikes until the labor market improves further.
A few weeks ago, outsiders speculated that the Bank of England would become the first major central bank to raise interest rates since the outbreak.
HSBC senior economist Liz Martins, who accurately predicted the results of this interest rate, said that he still expects the central bank to raise interest rates by 15 basis points in February next year and 25 basis points in August, and continue to take similar actions in 2023.
“There are risks in every direction,” she said. “We did not feel that the Bank of England was in a hurry.”
In response to market expectations that the central bank may raise interest rates to 1% next year, Bailey pointed out at a press conference that doing so will cause the economic growth rate to fall below the 2% target during the forecast period. He said he was “cautious” towards this view.
Pele said in a TV interview later that the market’s pricing before the announcement of today’s policy decision was “in the right direction, but overwhelmingly”. He bluntly said that he was “confused” with market views.
Central bank officials also warned that if energy prices start to fall sharply as market expectations from the middle of next year, then inflation will fall further below the target.
The decision to keep interest rates unchanged has raised questions about the central bank’s ability to communicate, especially with Governor Bailey. He did not reject the market’s interest rate hike bets before, but instead voted against it at the meeting.
Bloomberg Economist
“The central bank’s revised forecast indicates that more austerity measures will be implemented in 2022, but the intensity is much smaller than the financial market’s forecast. We believe that interest rates will be raised in December and then will be raised for the second time in May next year.”
–Dan Hanson
Central bank officials expressed growing concerns about economic growth prospects and pointed to signs that consumption is weakening due to supply bottlenecks and soaring oil, gas and electricity costs.
The central bank currently predicts that the economy will not return to its pre-epidemic scale until January to March next year, which is later than originally expected. The Bank of England lowered its economic growth forecast for 2022 from 6% to 5%, and forecasts that the economic growth rate in 2023 will slow down significantly to 1.5%, and to 1% a year later.
However, the short-term inflation outlook is deteriorating, and the bank currently predicts that the price increase in April 2022 will reach 5%, which will be the highest level since 2011. However, the inflation rate is expected to fall afterwards.
Only two officials, Dave Ramsden and Michael Saunders, voted for immediate action. They pointed out that unless interest rates rise, the inflation rate may be higher than the target in the next few years.
The two, as well as Catherine Mann, also voted to lower the Bank of England’s government bond purchase target by 20 billion pounds to 855 billion pounds. The purchase of treasury bonds will end before the end of this year.
Most policy committee members believe that there is a reason to wait, saying that immediate action requires a price. They said that the current monetary policy stance will bring more room for tightening rather than relaxation.
Source: Financial World NetworkReturn to Sohu to see more
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