BoE leaves policy unchanged despite inflation pick-up
By Sean Farrell
Date: Thursday 05 Aug 2021
(Sharecast News) - The Bank of England left monetary policy unchanged even as the central bank predicted inflation would rise higher than previously expected.
The monetary policy committee voted unanimously to leave interest rates at their record low of 0.1% and voted 7-1 to maintain the £875bn target for government bond purchases.
Michael Saunders, an external member of the MPC, voted to reduce the bond-buying target to £830bn. Saunders and another member, Dave Ramsden, gave speeches recently expressing concern about inflation.
Inflation was 2.5% in June, above the BoE's 2% target. The central bank said on Thursday it expected inflation to hit about 4% by the fourth quarter of 2021 - higher than previously predicted - before falling back close to the target from that point on.
"The committee's central expectation is that current elevated global and domestic cost pressures will prove transitory," the BoE said. "Nonetheless, the economy is projected to experience a more pronounced period of above-target inflation in the near term than expected in the May [inflation] report."
The BoE said it expected to start cutting its stock of purchased bonds when Bank Rate reaches 0.5% and would start to sell the securities when that rate hits 1%. The bank had previously said Bank Rate would reach 1.5% before it started unwinding its bond programme, known as quantitative easing.
BoE Governor Andrew Bailey has said the BoE would not be rushed into increasing rates with the economy still fragile and little evidence that rising prices would persist. But some economists, including former Governor Mervyn King, have warned against complacency over inflation.
The MPC said some members thought progress had been made towards eliminating spare capacity in the economy and getting back to the 2% target the conditions had not been met while others thought they had but that there were other things to consider before tightening monetary policy.
The MPC said "some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term".
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The committee was split on whether the necessary but not sufficient conditions for future policy tightening specified in its prior guidance already had been met. As a consequence, it dropped this guidance. Even so, 'modest' implies that the committee collectively sees little need to hike sooner or further than markets' currently expect.
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