The November policy meeting of the Bank of England last week ended with the key official rate unexpectedly remaining unchanged at 0.1%. In the lead-up to the meeting, market expectations had hardened on the prospect of a near-term rate hike on the back of a number of comments from Bank of England governor Andrew Bailey.
The voting split was seven-to-two in favour of a no change and surprisingly, the governor did not vote for a rate hike. However, the Bank of England said if incoming data were in line with its latest forecasts, then it would be “necessary over the coming months to increase rates” to achieve its objective of returning inflation sustainably to a 2% target.
The bank's latest economic forecasts see inflation falling to 1.9%, just below the 2% target, by the end of 2024 – based on official rates rising to 1% by the end of 2022 and remaining around this level over the following two years.
Not surprisingly, there were significant moves in the markets. A UK rate hike is now not expected until early next year. Meanwhile, the market is now envisaging that rates will get to 1% by the end of 2022.
The Bank of England meeting was the fourth in the past couple of weeks, where central banks have knocked back on rate hike expectations.
The ECB has been quite blunt, with president Christine Lagarde saying despite the current inflation surge, the outlook for inflation over the medium term remains subdued and therefore conditions for interest rate hikes in the eurozone are very unlikely to be satisfied next year.
ECB chief economist Philip Lane on Monday reiterated the central bank official message. He told a Spanish newspaper that eurozone inflation would ease next year.
Chair of the US Federal Reserve Jerome Powell can be patient about rate hikes, which he indicated could perhaps come in late 2022, if employment has recovered sufficiently by then.
Given these forthright comments from other central banks, it was going to be difficult for the Bank of England to buck the trend and hike rates last week.
Markets, though, are not taking the central bankers messages fully on board. Euro markets are still pricing in that the ECB will increase rates by 15 basis points next year, with another quarter point hike expected in 2023. In the US, markets see the Fed hiking by a quarter point next September, followed by a series of rate increases in 2023.
The view of central banks remains that the spike in inflation will not be sustained and annual rates should start to fall back towards target from around the middle of next year.
The trend in energy prices, in particular, will be important in this regard. Notably, the Bank of England indicated that if wholesale energy prices fell back as predicted by futures contracts, then inflation would decline to well below target by 2023.
- Oliver Mangan is chief economist at AIB