City analysts expect Bank of England policy makers to largely ignore rising inflation and soaring house prices when they deliver their latest decision on interest rates on Thursday.
The central bank’s Monetary Policy Committee (MPC) will meet to discuss whether to make any changes to UK interest rates and quantitative easing, with an announcement due lunchtime on Thursday. Consensus in the City is that the MPC will leave policy unchanged despite rising price pressures. But policy makers are expected to signal they are keeping a close eye on the data.
Thursday will be the final MPC meeting featuring BoE chief economist Andy Haldane, who is leaving to run the Royal Society of Arts.
Haldane is the sole hawk on the MPC and has repeatedly warned that inflation threatens to overheat the UK economy unless the Bank acts to curb price rises. He voted to reduce the size of the Bank of England’s stimulus package at the last MPC meeting.
Haldane’s calls for action will no doubt be louder this time around after inflation blew past forecasts in May. Average price rises jumped from 1.5% to 2.1%, breaching the Bank’s 2% target.
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But private sector economists think Haldane will be outgunned on nine-person MPC and expect the Bank of England to hold the UK’s interest rate unchanged at 0.1% and maintain its programme of asset purchases at the current level of £895bn ($1.2tn).
“We expect the Bank of England to leave policy unchanged at this week’s meeting but to strengthen hawkish rhetoric,” Bank of America economists Robert Wood, Mark Capleton and Kamal Sharma wrote in a note. “Another rate-setter may be joining chief economist Andy Haldane to vote to end the QE programme early.”
Bank of England governor Andrew Bailey has consistently argued that the current inflationary pressure is “transitory”: a temporary blip driven by skewed comparisons to last year and continuing state support measures like furlough and a commercial eviction holiday.
While Bailey is likely to signal that so-called ‘upside’ pressures are growing — meaning inflation could prove not to be so temporary — he is not expected to disavow his “transitory” theory altogether.
City analysts upgraded forecasts for peak UK inflation on the back of May’s blockbuster reading but most agree with Bailey that the rise is likely to be temporary.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, this week pointed out that two-year annualised inflation, which ignores distorting effects from COVID, is running at 1.3%.
“Now is a good time to dust off some alternative inflation measures, which the MPC might examine to gauge underlying price pressures,” Tombs wrote in a note on Tuesday. “At present, none of these alternative gauges give reason to be concerned that CPI inflation will take a long time to fall back to the 2% target next year, after it has peaked in the fourth quarter of this year, though it is still early days.”
The MPC’s policy statement will be published at 12pm UK time on Thursday 24 June.
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