Oliver Mangan: Why the return of the Roaring Twenties is unlikely

Given the growing optimism about a strong economic rebound, minds are turning to when the Bank of England might tighten policy
Oliver Mangan: Why the return of the Roaring Twenties is unlikely

The general tone of the Bank of England’s monetary policy meeting statement and minutes was one of growing optimism.

There had been some speculation in the lead-up to last week’s monetary policy meeting in the UK that the Bank of England might announce a tapering of its quantitative easing (QE) bond purchase programme, given the improving prospects for the economy. 

While the BoE did indeed announce a slowing in the pace of asset purchases, it emphasised that “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Though the BoE reduced its weekly asset purchases to £3.4bn from £4.4bn, this can be viewed as a largely technical move as the size of the QE programme remained unchanged.

The bank still intends to complete its latest programme of purchases in full by around the end of this year.

Growing optimism

The general tone of the bank’s monetary policy meeting statement and minutes was one of growing optimism in relation to the outlook for the UK economy. 

This was clearly evident in its latest Monetary Policy Report. The BoE revised higher its GDP growth forecast for this year to 7.25%, from 5%. 

It now anticipates that GDP will recover to its pre-Covid level by the end of 2021. The pace of growth is expected to remain strong next year at 5.75%, before slowing to about its trend rate of 1.75% in 2023.

Meanwhile, in terms of labour market conditions, the bank now envisages the unemployment rate peaking at just under 5.5% in the second half of this year. This compares to its previous projection in the February Monetary Policy Report of it peaking at 7.75%. 

This largely reflects the extension in the March budget of the government’s furlough scheme until September, well after the economy has reopened, which will certainly help contain the rise in unemployment.

Inflation

On the inflation front, the bank expects the consumer price index (CPI) rate will rise temporarily above its 2% target towards the end of this year. It attributes this anticipated increase mainly to developments in energy prices. 

It expects these to be transitory and have few direct implications for inflation over the medium term, with the CPI rate expected to return to about 2% target during 2022-23.

Given the growing optimism about a strong economic rebound, minds are turning to when the bank might tighten policy. 

It is due to finish up its current round of asset purchases by the end of 2021, opening up the possibility that interest rates could start to be raised at some stage next year. 

Futures contracts have moved in this direction in recent months, with markets pricing in a rate hike from the BoE during the second half of 2022 that would take the bank rate up from 0.1% to about 0.25%.

Perhaps the most intriguing aspect of the bank’s forecasts, though, is the sharp deceleration in growth to 1.75% expected by 2023. 

Cautious view

The IMF takes a similarly cautious view in regard to the prospects for the global economy post the current rebound. Neither expect any long-lasting, lagged impacts on activity from the current very loose stance of macro policy, or, indeed, from the return of big government, the acceleration of green and sustainable investment, multiplier effects, and the release of pent-up demand.

A repeat of the “Roaring Twenties” decade of the last century, then is not anticipated. Hence, markets are looking for UK rates to rise at a snail’s pace, increasing by about 25bps a year from 2022 and only getting to 1% by end 2025.

Oliver Mangan is chief economist at A IB

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