In a move that confounded market expectations, the Bank of England left interest rates unchanged at a record low of 0.1%, even as it published its highest inflation forecast for a decade.
To add insult to injury, just two members of the nine-person MPC voted to increase rates. Despite a series of hawkish comments from Governor Andrew Bailey in the run-up to this hotly awaited meeting, he was surprisingly among those opting to keep policy unchanged this month. In regard to the quantitative easing programme, three members of the committee, Catherine Mann, Dave Ramsden, and Michael Saunders wanted to end the bond-buying programme immediately.
Today’s decision shows that the BoE remains concerned about growth and is willing to keep their powder dry until more information on the labour market is available after the end of the furlough scheme. Members will benefit from two more job reports before its pre-Christmas meeting. There are other uncertainties too in raising interest rates. At a time when rising energy costs are impacting households amid ongoing supply chain disruptions, tighter fiscal policy and Brexit dramas could all hurt the economic recovery.
Inflation remains the chief concern for policymakers and is expected to rise to just under 4% in October, while peaking at around 5% in April 2022 according to the bank’s new forecasts. But the MPC stated that higher inflation “was still most likely to prove transitory” and not lead to persistently higher interest rates.
The BOE added that rates could rise in the “coming months” if the economy improves. The key question now if whether the MPC waits until February when the bank produces its new forecasts and there is a scheduled press conference. According to money markets, the probability of a rate hike in December stands at just below 50%, as of writing.
Sterling was thrown into the pit following the BoE decision, weakening against every single G10 currency. The GBPUSD is under pressure on the daily charts with prices tumbling roughly 1% to trade below 1.3570 this afternoon. Momentum remains heavily bearish with a solid daily close below this support level opening the doors towards 1.3500 and the recent low at 1.3410. Before bulls can jump back into the game, a move back above 1.3670 needs to be secured.
