Regulation

The Bank of England made a big decision: what do banks make of it?

The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain interest rates at 0.1%. This is a big move by the big body and is set to make waves. Patrick Brusnahan speaks to the experts

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ccording to the Bank of England: “At its recent meetings, the Committee has judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2% inflation target sustainably in the medium term. The latest developments, set alongside the Committee’s updated projections, reinforce this view. Nevertheless, near-term uncertainties remain, especially around the outlook for the labour market, and the extent to which domestic cost and price pressures persist into the medium term.

“At this meeting, the Committee concluded that the existing stance of monetary policy remained appropriate.”

Daniele Antonucci, chief economist & macro strategist, Quintet Private Bank

“Contrary to market expectations, the Bank of England left rates unchanged. While a small hike before year-end is within the range of possibilities, we’ve been warning against what looked like too much of an aggressive prediction to us.

“We suspect that some of the UK shortages are more structural in nature. In part, they could be related to labour bottlenecks post-Brexit. But we didn’t think that a hike today was a done deal, given the loss of momentum across the economy.

“Ahead of the meeting, the market looked for the Bank Rate to rise to 1.25% by end-2022 followed by 40 bps in cuts from mid-2023 to end-2025. In essence, the market seemed to expect a ‘policy error’ that the Bank would be forced to reverse at some point, a scenario we don’t find convincing.

“We project more moderate increases to 0.75% by the end of next year, as we think the near-term outlook is more challenging.

“Even though the Bank says that rate rises would be needed over coming months to restrain the spike in producer and consumer prices, it looks as if it’s now putting more emphasis on slower economic activity and expected falls in real incomes potentially putting downward pressure on inflation next year, when the shortages should subside too.”

Simon Lister, IFA, InvestingReviews.co.uk

"Many traders will be left scratching their heads at the decision.

"Though Threadneedle Street was unequivocal that rate rises are coming in the months ahead if its central projections are on point, for now it has erred on the side of caution, despite the fact that it now expects inflation to peak at 5% next April.

"The Bank went to the brink, looked into the abyss, and stepped back.

"The sheer extent of the economic chaos caused by the pandemic has created an unprecedented caution on the Monetary Policy Committee.

"Even if rates had been raised, the rise would almost certainly have been negligible so savers wouldn’t have been hanging out the bunting.

"For well over a decade, since the Global Financial Crisis, savers have been under siege and even though the Bank has made it crystal clear rates will be going up soon enough, there’s a chance many of us will not see the historical interest rate average again in our lifetimes."

Dean Turner, economist, UBS Global Wealth Management

“With markets on tenterhooks, in the end, the decision wasn’t even close. Despite very hawkish language of late, from the Governor in particular, the Bank of England kept interest rates on hold by a majority of 7-2. The market reaction is telling, with sterling down sharply after the announcement and gilts rallying.

“Nevertheless, we should still prepare for a hike in the coming months. It is clear that, if the economy moves broadly in line with expectations, interest rates will be going up, maybe as soon as December. However, the pace will be gradual, and the peak will be lower than markets were expecting going into the meeting.

“Although they didn’t move today, the Bank of England will likely be a first mover in the tightening game and this should underpin sterling which we expect to hold ground against the USD over coming months. As last night’s announcement from the FED shows, the US may not be far behind, which in turn could result in sterling losing some of its shine.”