The Bank of England left its key interest rate at a record low and quantitative easing unchanged, but markets are pricing a rate hike next year after the bank warned that inflation is set to peak above 4 percent this winter.
The Monetary Policy Committee unanimously decided to leave the key interest rate unchanged at 0.10 percent.
The MPC also retained the existing stock of corporate bond purchases at GBP 20 billion and the government bond purchases target at GBP 875 billion, taking the size of the total quantitative easing to GBP 895 billion.
While seven members voted to maintain the quantitative easing, Dave Ramsden joined Michael Saunders to seek an end to the current asset purchase programme as soon as practical rather than continuing it until around the end of the year, as currently planned.
These two members voted to reduce the target for the stock of government bond purchases from GBP 875 billion to GBP 840 billion.
The latest statement from the Bank of England suggested that policy tightening is nearing. The MPC noted that some “modest tightening” over the forecast period was likely to be necessary.
The MPC is getting closer to interest rate rises, Ruth Gregory, an economist at Capital Economics, said. As such, the first rate hike will be sometime in 2022 rather than in 2023.
Given the number of headwinds facing the economy this winter, a rate hike is unlikely until the second half of 2022 – later than investors are expecting, James Smith, an ING economist, said.
The announcement came after the US Federal Reserve signaled that the tapering of asset purchases is coming soon. In the statement, the Fed said, “a moderation in the pace of asset purchases may soon be warranted”.
As inflation exceeded the 2 percent target by more than one percentage point in August, BoE Governor Andrew Bailey wrote an open letter to the Chancellor Rishi Sunak citing the reasons for higher inflation.
Bailey said inflation is expected to rise further in the near term, to slightly above 4 percent in the fourth quarter of this year due to high energy and goods prices.
Nonetheless, inflation was expected to fall back to close to the 2 percent target in the medium term as the current elevated global cost pressures will prove transitory.
Citing supply constraints on output, the bank downgraded its growth outlook for the third quarter of 2021. The level of UK GDP for the third quarter was revised down by around 1 percent since the August Report.