- Ramsden switches to join Saunders in push to end bond buying.
- ‘Considerable uncertainties remain’ in U.K. outlook, BOE says.
The Bank of England raised the prospect of hiking interest rates as soon as November to contain a surge in inflation, which it now expects will exceed 4% following a spike in energy prices.
Noting the “modest tightening” in policy foreseen over its forecast horizon in August, “some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain,” the Monetary Policy Committee said in a statement on Thursday.
The central bank also agreed that any future tightening should start with an interest-rate increase, even if that “became appropriate” before its bond-buying program finishes around the end of the year. Two of the nine MPC members pushed to end those purchases early, with Dave Ramsden making his first dissenting vote in in four years on the panel.
The next MPC meeting is set for Nov. 4.
The pound rallied and government bonds fell as investors reacted to a decision that puts the BOE in the more hawkish camp of advanced-world central banks in a pivotal week. On Wednesday, the U.S. Federal Reserve announced that officials may taper bond buying soon, and Norway raised its interest rate on Thursday.
The U.K. central bank is trying to tame inflation that accelerated well beyond its forecasts over the summer, reaching 3.2% last month. Its new focus is enabled by stronger-than-expected jobs data that show unemployment will peak well below worst-case scenarios predicted at the onset of the pandemic.
While the BOE targets inflation of 2%, officials said the rate may temporarily exceed 4% in the final three months of the year. That’s slightly more than predicted in August.
Spiking gas costs that have caused turmoil in U.K. energy markets “could represent a significant upside risk,” and also mean that consumer-price increases double the target until the second quarter of 2022, the MPC added.
Signaling it could raise rates even before bond purchases expire the committee also appears to be “creating space to potentially hike as soon as November or December, something which we have previously attached a low probability to,” he said.
“We still expect the labor market and a softer growth outlook to stay the BOE’s hand for longer than financial markets expect. But it now looks like a first hike will come in May, six months earlier than we forecast prior to the decision.”
-- Dan Hanson, senior U.K. economist. Clickherefor full REACT.
Traders now are pricing a 15-basis-point rate increase in February, compared with May previously. The pound rallied as much as 0.7%, while 10-year gilt yields rose by the most in a week.
The BOE kept its own benchmark unchanged at a record-low 0.1%, while its stock of asset purchases is set to total 895 billion pounds ($1.2 trillion) by the end of this year in line with expectations. Deputy Governor Ramsden joined Michael Saunders in pushing to end bond purchases as soon as possible.
“There was increasing evidence from a range of global and domestic cost and price indicators that inflationary pressures were likely to persist,” the minutes said. “These members judged that, with the existing policy stance, inflation was likely to remain above the 2% target in the medium term.”
The decision was also notable for the participation of the MPC’s two newest members, who both voted with the majority on this occassion. Huw Pill, a formerGoldman Sachs Group Inc.analyst, replaced Andy Haldane as chief economist, and Catherine Mann, a one-time chief economist of the OECD, took up a post vacated by Gertjan Vlieghe.
While the BOE’s more hawkish rhetoric follows a noticeable spike in inflation, it also comes against the backdrop of an economic recovery that has shown signs of losing steam amid supply bottlenecks and labor shortages.
Data released on Thursday showed the U.K. had about 5.8% of its workforce on furlough at the start of this month even though that support program is set to expire Sept. 30. September is also shaping up to be the weakest month for private-sector activity since the height of the winter lockdown,IHS Markitsaid on Thursday.
“Based on the macro numbers, I don’t understand how the U.K. can justify being first for a hike,” said Fabrice Montagne, an economist atBarclays Plc.“The U.S. and Europe are ahead in terms of recovery. We might get a hike but it will be a very painful hike to deliver.”