- The odds strongly favour the Bank of England sitting tight on monetary policy on Thursday (18 March) following the March Monetary Policy Committee (MPC) meeting, says the EY ITEM Club.
- The EY ITEM Club expects a unanimous 9-0 decision by the MPC both to keep interest rates at 0.10% and the stock of asset purchases at £895bn.
- While the latest lockdown restrictions mean the economy will have contracted in Q1, there are – for now, at least – ample reasons for the Bank of England to hold off from further stimulus: there are signs activity has come off its January lows, there was increased near-term support for the economy in the Budget and the COVID-19 vaccinations roll-out is boosting growth prospects.
- While the Bank of England is likely to acknowledge rising inflationary risks, the EY ITEM Club expects the Bank to say that it needs to see evidence inflation will be sustained at the target rate of 2% before tightening policy.
- The EY ITEM Club suspects that the case for further Bank of England support for the economy will wane from Q2 2021 onwards as 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 a growing possibility that the Bank of England could tighten monetary policy in 2022, although at the moment, early-2023 is more likely.
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The odds strongly favour the Bank of England’s Monetary Policy Committee (MPC) sitting tight at their March meeting. It is very likely that there will be a 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.
“At the February meeting, all MPC members voted for unchanged monetary policy. While they said that they were fully prepared to take further stimulus action if the economy needed it, events since February look to have been relatively favourable overall and justify unchanged monetary policy.
“Admittedly, the economy looks headed for contraction in Q1 2020 with GDP declining 2.9% month-on-month in January. However, January’s contraction was less than expected, and the overall decline in the first quarter now looks likely to be less than the 4% quarter-on-quarter contraction the Bank anticipated in its February forecasts. Furthermore, the economy held up better at the end of last year than the Bank of England had anticipated, with GDP expanding 1.0% quarter-on-quarter in the fourth quarter – double the 0.5% growth rate that the Bank had estimated in February. The Bank expected a rapid recovery after 2021’s first quarter.
“There are also signs that activity has come off its January lows. The labour market continues to show considerable overall resilience with the unemployment rate only gradually rising, helped by the furlough scheme.
“Meanwhile, the Government has been able to set a road map for the easing of lockdown restrictions on the economy while the ongoing rapid roll out of the COVID-19 vaccines is boosting confidence in future activity.
“The additional near-term fiscal support provided to the economy in the Budget provides another reason for the Bank of England to hold off from any more stimulus – for now, at least.
“A significant development since the February MPC meeting has been the growing concerns about inflation risks as the economy recovers from the pandemic. This been reflected in a recent rise in global bond yields. One MPC member has expressed concern that inflation could rise markedly.
“Meanwhile, the Bank of England Governor said that the risks to the outlook have become ‘increasingly two-sided’, and stressed that the Bank would need to see clear evidence that inflation would be sustained at the target level of 2% before tightening monetary policy. It was also stressed that the outlook for both supply and demand in the economy are highly uncertain.
“It should also be borne in mind that the latest programme of £150bn of asset purchases, which was announced in November and started in January, is expected to last through to the end of 2021.”