Bank of England wrong leg market, holding interest rates on hold

London — The Bank of England held interest rates on Thursday, smashing investors’ expectations for a rise that would have raised borrowing costs by the world’s first major central bank after the COVID-19 pandemic.

The Bank of England quickly maintained its outlook, saying that if the economy worked as expected, bank rates would need to be raised “in the coming months” from a record low of 0.1%.

However, seven of the nine policymakers voted not to change interest rates so far so that they can see how many people are unemployed after the government’s layoff system has recently ended. ..

Governor Andrew Bailey said the uncertainty could be resolved with the release of two labor market data scheduled between now and the Bank of England’s next interest rate decision on December 16.

“But don’t assume (by saying) I’m giving you a strong clue about something,” he said at a press conference.

Investors have set a probability of about 60% for a rate hike in December in response to the BoE’s announcement. This is far less than the 100% probability raised at the November meeting.

Only two members of the Monetary Policy Committee, Vice President Dave Ramsden and Michael Sanders, voted for a 15 basis point rate hike.

The price of UK government bonds soared as Sterling fell most against the US dollar in more than six weeks and investors didn’t step into the BoE announcement.

Andrew Bailey
Bank of England Governor Andrew Bailey will take a photo on March 16, 2020, on the first day of his new role at the Central Bank of London, England. (TolgaAkmen / Pool via Reuters)

The market was confident that a rate hike would take place in November after Bailey talked about the need to act to curb inflation expectations last month.

Paul O’Connor, Head of Multi-Asset Team at Janus Henderson, said:

Bailey said he had never taken action.

“It was a very clear warning and statement about what we had to do in that conditional world, but it was conditional,” he sees in a comment he made on October 17th. And said.

Thursday’s announcement was a “very close call,” Bailey said.

The Bank of England’s prudent approach takes place the day after the Federal Reserve Board announced on Wednesday that it would begin curtailing its bond-buying program this month, a precursor to investors’ expectations for a first rate hike in mid-2022. increase.

The European Central Bank has made it clearer about its determination to continue the stimulus package. Governor Christine Lagarde said Wednesday that the ECB is very unlikely to raise rates next year.

On Thursday, the Bank of England said the MPC cast six to three votes to bring its government bond purchase program to full-frame £ 875 billion. Catherine Mann joined Ramsden and Sanders to reduce that part of the bank’s stimulus.

The total asset purchase target remained at £ 895 billion, including £ 20bn corporate bond holdings, which will begin reinvesting in more environmentally friendly debt this month.

“The value of waiting”

The BoE said most MPC members still consider it “worthy to wait” for data on the labor market.

The UK Census Bureau said earlier Thursday that evidence of the investigation showed that most workers who were still in the layoff program when it was closed at the end of September returned to their employers at the same time. rice field.

MPC members who voted against rate hikes also noted the recent slowdown in consumer demand.

According to a Reuters poll last week, economists expected six to three votes in favor of maintaining bank rates.

Bank of England
The Bank of England can be seen patrolling the City of London financial district in London, England, on June 11, 2021. (Henry Nichols / Reuters)

BoE’s new forecast shows that economic growth has slowed due to short-term global supply chain bottlenecks.

The world’s fifth-largest economy was seen returning to pre-pandemic scale in the first quarter of 2022, three months later than previously thought.

Growth in 2021 has been adjusted to 7%, and the 2022 forecast has plummeted to 1.5% in 2023 and 1% in 2024, after being lowered from the previous 6% to 5%.

Inflation surged to about 5% in April, primarily due to soaring global energy prices, returning just below the BoE’s target of 2% three years later.

This forecast was based on BoE’s usual practice of assuming that 6-month energy futures prices would not change during the remaining 3-year forecast period.

However, the BoE has turned its attention to alternative scenarios that are being factored into the energy market, including price declines in the second half of 2022.

The scenario showed that if interest rates also rise as fast as the market expects, inflation is likely to be “significantly lower” than the 2% target for 2023 and 2024.

Inflation forecasts have signaled investors that they are pricing with too many BoE rate hikes.

Interest rates used by banks have shown that bank interest rates will reach 1% by the end of 2022.

Bailey told investors not to expect rates as high as they expected.

William Schomberg, David Milliken, Andy Bruce