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The Bank of England (BoE) left monetary policy unchanged this week with the Bank Rate at 0.1% and the asset purchase target at £895bn (£875bn gilts, £20bn corporate bonds). This was as expected, however, Deputy Governor Dave Ramsden joined external member Michael Saunders in voting to start to tighten monetary policy by limiting the asset purchase programme at £840bn in gilts.
Minutes described the outlook for CPI inflation, which the BoE now warned was likely to slightly exceed 4% in Q4 2021. As well as the aforementioned supply bottlenecks, the BoE noted rising wholesale gas prices as an additional upside risk to the price outlook. However, the minutes reiterated that they still expected the inflation spike to be transitory and that there were “good reasons to expect a material supply response in commodity and other global goods markets”. They suggested that the medium-term outlook was still that the inflation shock would remain “transitory” and return to close to 2% over the medium-term. The minutes also made clear that monetary policy should only respond to “medium-term” price pressures and not to “transient” developments. The minutes concluded that inflation expectations “remained well anchored”, but that the Committee would continue to “monitor very closely” future developments.
In the context of longer-term drivers of inflation, the MPC focused on the labour market – as this was also the area causing the most uncertainty. Short-term developments pointed to a tight labour market with unemployment falling to 4.6% in the latest report, vacancies elevated and reports of hiring difficulties rising. At the same time the numbers of workers remaining on furlough had reduced, but by a “materially lesser degree” than the Committee had expected, with an estimated 6% of private sector jobs still on furlough in early September – some sectors seeing high vacancies and high recorded furloughed workers at the same time. The Committee concluded that the outlook for the labour market was “particularly uncertain” for now, but that much of that uncertainty may be resolved over the coming months.
In terms of the monetary policy outlook, it was no surprise to see policy unchanged, but Dave Ramsden’s vote to tighten policy adds to market expectations that the MPC could raise interest rates in 2022. However, November’s policy meeting will be interesting in assessing to what extent the BoE’s persistent growth optimism is fading. Moreover, the evolution of the labour market over the coming quarters will be critical. We do envisage some increase in unemployment as furlough ceases. That being the case we fully expect inflation to fall back materially in 2022 and the BoE to largely look through the current inflation spike. However, at the same time demographic effects and post-Brexit migration trends do seem to have left the UK with a less benign labour supply.
Outside Europe, which has started to emerge later than China and the US from the massive GDP loss of 2020, the dataflow is pointing to a slower pace of recovery. This was always going to happen once the immediate catch-up effects after the reopening were absorbed.
What is reassuring though is that majority of the current issues should prove transitory and/or manageable. The very latest data suggests the Delta variant wave has reached a plateau in the US. While purchasing power is hit, households in advanced countries sit on piles of cash thanks to the savings accumulated last year. While it may take time to sort out the sources of supply disruptions, there are tentative signs that price pressures in some of the hottest sectors – for instance used cars in the US – have started to abate. Finally, the Chinese slowdown is largely self-inflicted and policy driven, hence reversible.
I trust all is well with you, do have a good weekend.