Sunday, July 25, 2021

business

BOE warns against tightening too soon as inflation surges


The Bank of England pushed back against speculation that a surge in U.K. inflation means its preparing to boost interest rates, saying the economy still needs support to recover from the pandemic.

The central bank warned against "premature tightening," toughening its language on the need to maintain stimulus. The remarks contrasted with a sharp increase in the bank's outlook for inflation, which officials now see peaking at 3%, a half point higher than their forecast just six weeks ago.

The BOE's sanguine view follows heightened anxiety among investors and economists that consumer price increases may prove sticky. Last week, the U.S. Federal Reserve brought forward its expectations of rate increases, while central banks in Hungary and the Czech Republic already started raising borrowing costs in recent days.

"Today's decision reinforces our belief that the committee will continue providing monetary support through the economic restart," said Vivek Paul, U.K. chief investment strategist at BlackRock Investment Institute.

Officials led by Governor Andrew Bailey voted unanimously to keep the benchmark lending rate at 0.1% and by 8-1 to maintain the pace of its bond purchases, targeting a cumulative 895 billion pounds ($1.2 trillion) by the end of this year. Chief Economist Andy Haldane, who steps down from the nine-member Monetary Policy Committee this month, pressed for a reduction in the stimulus.

The pound dipped against the dollar and euro after the decision, and U.K. stocks ticked higher. The yield on U.K. government 10-year bonds fell after the decision. Money-market bets on the BOE raising interest rates were also pushed back by two months to August 2022.

"Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory," the BOE said in a statement on Thursday.

The rest of the MPC said the economy still has plenty of slack built up during lockdowns that forced thousands of businesses to close during the pandemic. The bank reiterated that it does not intend to tighten policy until there's clear evidence that inflation will stay above target for a sustained period.

"Spare capacity in the economy was expected to be eliminated as activity picked up, and there was expected to be a temporary period of excess demand," the BOE said. "As these transitory effects faded, conditioned on the market path for interest rates, inflation was expected to return to around 2% in the medium term."

Inflation leaped above the bank's 2% target unexpectedly for the first time in almost two years last month, fanning speculation about when policymakers will have to ease off on stimulus. A growing minority of economists is now anticipating an interest rate increase sometime next year.

"Everyone is trying to work out if the inflation increase is temporary or here to stay," said Alex Maddox, capital markets and digital director for Kensington Mortgages. "By keeping rates constant, the MPC is suggesting it's the former."

Some economists who expect rates to rise next year said the bank may have to change its tone in the months ahead despite the relatively relaxed outlook delivered on Thursday.

"Our own view is that inflation will continue to rise well above the Bank of England's target in the coming months and that not all of this will prove transitory," said Ambrose Crofton, Global Market Strategest at J.P. Morgan. "We expect current signs of tightness in the labour market to persist. Upward pressures on wages will support medium-term inflation momentum."

For now, the policymakers both at the BOE and Treasury have been focused on supporting millions of workers either unemployed or on furlough after coronavirus restrictions forced thousands of businesses to close. The BOE expects unemployment to touch 5.4% in the third quarter before falling back below the current level near 5% next year.

Bank staff revised up their expectations for gross domestic product growth to 5.5% in the second quarter from the 4.25% rate they estimated in May. That would be consistent with output in that period being less than 4% below its pre-pandemic level.

 

Policymakers are due to revise inflation forecasts in August. Their latest outlook published last month suggested a sharp recovery in the second half of the year, leading to inflation peaking around 2.5% at the end of this year. The latest reading for May was 2.1%, above the expectations of both the BOE and economists.

Published : June 25, 2021

By : Syndication Washington Post, Bloomberg · Reed Landberg, Lizzy Burden