- The Bank of England fully met expectations by sitting tight on monetary policy at the March Monetary Policy Committee (MPC) meeting, with unanimous 9-0 votes both to keep interest rates at 0.10% and the stock of asset purchases at £895bn.
- The MPC seemed more upbeat overall about the recent performance of the UK economy and its near-term growth prospects compared to its February assessment; the MPC now also expects a lower peak in unemployment.
- Nevertheless, the MPC still considers there to be significant uncertainties over the outlook.
- The MPC came across as less concerned about rising inflation risks than the markets – although the minutes of the meeting acknowledged there were varying views within the MPC over the current amount of spare capacity in the economy and how the supply and demand sides are likely to develop. The MPC stressed that they need to see evidence that inflation will be sustained at the target rate of 2% before tightening policy.
- The EY ITEM Club believes that the Bank of England's next move will be to tighten policy, initially through edging interest rates up from the current level.
- The EY ITEM Club suspects that the case for further Bank of England support for the economy will wane from Q2 2021 onwards as the recovery takes hold.
- Consequently, the EY ITEM Club believes that the Bank of England is most likely to hold off from acting throughout 2021, keeping interest rates at 0.10% and the targeted stock of asset purchases at £895bn.
- There is clearly a growing possibility that the Bank of England could tighten monetary policy in 2022, although at the moment, early-2023 seems more likely.
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The odds always strongly favoured the Bank of England’s Monetary Policy Committee (MPC) sitting tight at their March meeting. It was no surprise that there were unanimous 9-0 votes within the MPC both for keeping interest rates unchanged at 0.10% and for maintaining the targeted stock of asset purchases at £895bn. The Bank of England stated that it plans to keep the pace of its purchases of gilts steady at around £4.4bn per week.
“The MPC comes across overall as more upbeat on the UK economy. The minutes concluded that ‘the news on near-term economic activity had been positive, although the extent to which that news changed the medium-term outlook was less clear.’
“The committee noted that GDP growth of 1.0% quarter-on-quarter in the fourth quarter of 2020 had been a little stronger than they had expected in February. Furthermore, the GDP contraction of 2.9% month-on-month in January was less than had been expected, largely due to developments in public sector output, specifically health output. However, the MPC did consider that the private sector performance in January had been broadly in line with weak expectations.
“The Committee also considered that restrictions on UK economic activity will likely be lifted faster than they envisaged in February as the vaccines are rolled out. This could lead to stronger consumption growth than had been expected in the second quarter, although the MPC was cautious about the longer-term implications. Meanwhile, the Budget held earlier this month was seen providing more near-term support to the economy, including the extension of the job furlough scheme.
“While the MPC considered that the unemployment rate of 5.1% in the three months to December likely underplayed the amount of ‘slack’ in the labour market, they thought that the extension of the furlough scheme in the Budget meant that the near-term rise in the unemployment rate would be less than they had expected in February. With the furlough scheme now due to last until September, when the UK recovery is expected to be robust, the MPC considered there is a reduced risk that furloughed workers will not be re-integrated into the workforce.
“The MPC also considered that developments in global growth had been a little stronger than they had expected in February, while the major US fiscal stimulus package should provide significant extra support.
“While the minutes did not come across as significantly more concerned overall about inflation, there was acknowledgement that ‘there was a range of views across MPC members on the degree of spare capacity in the economy currently, whether demand would outstrip supply during the recovery from the pandemic, and how the assessment of supply should take into account the unique nature of the economic shock from the pandemic.’
“The minutes also said that the MPC considered that consumer price inflation – 0.7% in January – would rise to around its 2% target level in the spring, lifted primarily by unfavourable oil base effects and increasing energy prices. Inflation was projected to be close to 2% over the medium term.
“The MPC observed the recent rapid rise in advanced country bond yields to levels similar to those that had been seen shortly before the pandemic. The MPC considered this development to be in line with the rapid roll out of COVID-19 vaccines and the boost to global growth from the US fiscal package.
“Concluding, the MPC indicated that they are still prepared to take further stimulus action to support the economy should it fail to pick up as anticipated or if downside risks intensify. Specifically, the minutes noted that ‘The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit.’
“On the inflation front, the MPC indicated they will not be minded to tighten monetary policy any time soon. The March minutes said: ‘The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.’”