Bank of England holds rates at 0.1% despite change of tone

MPC says inflation is likely to reach 4% towards the end off 2021

The Bank of England confirmed on Thursday that there may need to be some “modest tightening of monetary policy” over the next two years in order to minimise the potential impact of high inflation.

The Monetary Policy Committee (MPC) said that inflation is likely to reach 4% closer to the end off 2021, alongside a robust recovery, as the committee agreed at its latest meeting that conditions have been met to examine the possibility of hiking interest rates.

However, the MPC does not feel compelled to act with speed by any stretch of the imagination.

The committee voted unanimously to keep interest rates at the historic low of 0.1%, while all but one member out of eight voted to keep the £150bn programme of purchases of government debt in place.

The Bank of England referenced the efficiency of the vaccine roll-out in changing the outlook of the UK economy, as restrictions have been lifted on a number of key industries.

Subsequently, consumer spending bounced back since April, along with output, meaning the need for stimulus is less acute.

Ed Monk, associate director, Personal Investing at Fidelity International, believes the mood at the Bank of England appears to be changing.

“This is yet to translate into any change in monetary policy and rate-setters voted 7-1 to keep rates and asset purchases at their current levels, but the minutes from the August meeting reveal that some members now believe the conditions for some tightening have been met,” said Monk.

“The labour market remains key with recent wage rise and unemployment data turning out stronger than expected. That points to a broad-based rise in demand that may not recede as the economy recovers from the pandemic.”

“While the Bank rate is still likely to remain at its current 0.1% this year, expectations of a future rise have come in somewhat and markets may have to process a quicker return to more normal monetary policy. The Bank may soon have to balance the need to control inflation with the potential for instability created by imposing higher borrowing costs. Younger generations in particular have never experienced high inflation and rising rates, and will be unused to feeling the effects of a rise in the mortgage payments,” said Monk.