Britain’s central bank looks set to keep interest rates steady. This is because, it approaches the end-point of its 895-billion-pound asset purchase program. They are casting a wary eye over surging inflation pressures. Investors will be keen to see if more Monetary Policy Committee (MPC) members join external member Michael Saunders. The BoE is ahead of other banks in planning to stop quantitative easing. Half its policymakers judged in August that some preconditions for an interest rate rise had already been met.
The U.S. Federal Reserve cleared the way to reduce its monthly bond purchases. The increase in interest rate may follow more sooner than expected, according to them. In August, the BoE revised up its forecast for inflation to 4%. This reflects the higher energy prices and post-COVID-19 bottlenecks. Natural gas prices have surged across Europe in recent time. If rising inflation pushes up longer-term inflation expectations among the general public, leading to firms and workers factoring above-target inflation into future pricing decisions and wage demands.
A monthly survey from Citi showed that the sharpest monthly rise in year-ahead inflation expectations hit a nine-year high of 3.2%. the economists in Citi said that this print could tilt the balance of risks to the hawkish side for the MPC meeting. More may join Michael Saunders in voting for an early end to asset purchases, and even dissent on Bank Rate cannot be ruled out. Two new policymakers join the MPC. They are the former European Central Bank and Goldman Sachs economist Huw Pill and Catherine Mann.
The BoE is expecting that the Britain’s economy will regain its pre-COVID-19 size at the end of this year. But a surge in the coronavirus cases caused growth to slow. Hence, the business surveys suggest momentum has been hard to regain. Furlough support payments for over a million workers end this month. This is because of a temporary increase in other welfare payments, squeezing households at a time when inflation is pushing up the cost of essentials.
