Press release

23 Sep 2021 London, GB

Divisions on the MPC increase, but ‘wait and see’ continues for now – EY ITEM Club comments

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Nick Cosgrove

Senior Manager, Media Relations, Ernst & Young LLP

Professional services corporate communications specialist. Reluctant dog owner and long-suffering Watford fan.

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  • The recent rise in inflation and increase in energy prices prompted increased divisions in September’s MPC meeting. The Committee was unanimous in voting to keep the Bank Rate at 0.1%, but Michael Saunders was joined by a second member, Dave Ramsden, in voting to end QE early.
  • The Committee considers that the need for a tightening of monetary policy over the next few years has strengthened. The MPC nudged up its inflation forecast to just above 4% by the end of the year, with the recent rise in gas prices risking an even steeper climb. But it also noted that the near-term growth outlook has weakened and that there remains significant uncertainty over the outlook for the jobs market once the furlough scheme ends. 
  • The EY ITEM Club continues to expect the MPC to raise interest rates in late 2022, when pandemic-driven distortions to inflation should have faded and the economy is securely back on the path to its pre-pandemic trajectory.   

Martin Beck, senior economic advisor to the EY ITEM Club, says: 

“September’s MPC meeting delivered a 9-0 vote in favour of keeping the Bank Rate unchanged. The vote on asset purchases saw Michael Saunders again voting to cut the target stock of asset purchases from the planned £895bn, effectively ending QE immediately. But, this time, he was joined by Dave Ramsden. As expected, the two new committee members, Huw Pill and Catherine Mann, followed the consensus position in both votes.

“The MPC maintained its guidance that it plans a “modest tightening” of monetary policy over the next few years. But it also thought that the case for this guidance had strengthened since August’s meeting. The committee responded to August’s higher-than-expected inflation outturn and stronger pipeline price pressures by raising its forecast for inflation in the near-term. It now expects the CPI measure to peak at “slightly above” 4% by the end of the year, up from 4% previously. 

“The MPC also acknowledged that supply-side pressures, such as component and labour shortages, have intensified since August’s meeting. The impact of these pressures on output is now seen as being “more persistent”. Inflation is predicted to remain above 4% until the middle of next year, falling back more slowly than the MPC expected in its last forecast. And the recent rise in gas prices is seen as “a significant upside risk” to inflation in 2022. The committee also took note of a rise in inflation expectations among the public in the latest survey evidence.

“But these developments were balanced by other factors. The committee remains confident that inflation expectations are well anchored, noting that the rise in expectations in the Bank of England’s recent survey took them back only to the survey’s long-run average. It also stuck to the view that cost pressures from supply-side shortages and bottlenecks are likely to be transitory. And the softness of the economy in July, and evidence from some real time measures that activity growth remained fairly slow in August, offered further reason for taking a cautious approach. The MPC cut its forecast for GDP growth in the third quarter by almost 1%, reflecting a combination of problems with supply and a slower-than-expected recovery in demand for some services.

“Given recent developments, it wasn’t surprising that all members of the MPC agreed that the previous criteria for considering tighter policy – significant progress in eliminating spare capacity and achieving the 2% inflation target sustainably – were no longer useful. But all in all, the MPC seems content to continue with a ‘wait and see’ approach, biding its time to resolve uncertainty around the true size and persistence of supply-side constraints, the effect of the closure of the jobs furlough scheme on 30 September, and the path of the economic recovery. This implies no change in current policy settings for the time being, beyond existing plans to ease the amount of policy support. The Bank is already tapering its QE programme, and the expansion of the Bank’s balance sheet will end at the close of the year. The EY ITEM Club continues to expect no rise in Bank Rate until late 2022, when pandemic-driven distortions to inflation should have faded and the economy is securely back on the path to its pre-pandemic trajectory.”