The Bank of England Is Ready To Raise Rates if Inflation Does Not Fall


The Bank of England's Monetary Policy Committee will meet on Thursday to decide whether to raise interest rates.

Some of its members have hinted that a hike is imminent, but the nine-member MPC will have to determine whether to tighten monetary policy this week or wait until its meeting in mid-December.

The UK has been suffering from persistently high inflation and moderate growth.

Markets are unsure of the timing, and analysts suggest the vote is likely to split. Some BOE lawmakers, such as Governor Andrew Bailey and renowned hawk Michael Saunders, have hinted that they might back an immediate raise, while others seem more reluctant.

Silvana Tenreyro recently pointed out that she would need to see more labor market data after the end of the UK leave scheme on September 30 before voting to begin the path to policy normalization.

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By some statistics, derivatives traders were trading with a 64% probability of a 15 basis point rate hike this week.

Senior economist Kallum Pickering said that while his team considers the first rise in December to be "a bit more likely," a move this week would not be a surprise, noted and CNBC article.

Support for the Economy During the Recovery

The UK financial system has provided support to households and businesses to weather the economic disruption from the Covid pandemic, reflecting the resilience that has been built up since the global financial crisis alongside the exceptional policy responses of the UK authorities.

UK GDP is projected to recover further over the remainder of the year towards its pre-pandemic level, although the outlook for the economy remains uncertain. The pace of recovery has slowed recently, and inflationary pressures have risen.

The BoE expects banks to use all elements of their capital buffers as necessary to support the economy through the recovery. It is in banks’ collective interest to support viable, productive businesses, rather than seek to defend capital ratios by restricting lending.

To support bank lending to households and businesses as the economy recovers, the BoE is maintaining the UK Countercyclical Capital Buffer (CCyB) rate at 0%.

The BoE has previously stated that it expects to maintain a 0% UK CCyB rate until at least December 2021. It will re-evaluate the appropriate level of the UK CCyB rate in light of the risk environment at that time. In line with the standard implementation period, any subsequent increase would not be expected to take effect until the end of 2022 at the earliest.

 

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