The Bank of England left interest rates at their record low of 0.1%, confounding strong expectations for a first hike since the coronavirus pandemic began.
The decision on Thursday comes despite growing signs of inflationary pressures in the economy.
The Bank’s monetary policy committee voted 7-2 in favour of the move, with Sir Dave Ramsden and Michael Saunders wanting an increase to 0.25%.
Another member joined those wanting to ease the Bank’s bond-buying programme, which was maintained at GBP875bn after a 6-3 vote.
The Bank said: “At its recent meetings, the [monetary policy committee] has judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2% inflation target sustainably in the medium term…
“Nevertheless, near-term uncertainties remain, especially around the outlook for the labour market, and the extent to which domestic cost and price pressures persist into the medium term.
“At this meeting, the committee concluded that the existing stance of monetary policy remained appropriate.”
But the BoE’s updated guidance was that rate hikes would be needed “over coming months”.
The MPC predicted inflation will rise to just under 4% in October and climb to 4.5% in November and remain around that level through the winter, driven by higher fuel prices and increases in core goods and food prices.
Consumer price inflation (CPI) is now expected to peak at around 5% in April 2022, materially higher than expected in the August report, before pricing pressure is anticipated to dissipate as supply disruption eases, global demand rebalances and energy prices stop rising.
As a result, CPI inflation is projected to fall back materially from the second half of next year and is expected to be a little above the 2% target in two years’ time and just below the target at the end of the forecast period.
Given the Bank’s brief is to look at the medium term, rather than factors that are likely to be “transient”, it judged it appropriate to leave rates on hold.
But it hinted at rate increases in the coming months.
“Provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November monetary policy report, it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”
One market analyst, Neil Wilson at Markets.com, recited the grand old Duke of York nursery rhyme, as BoE governor Andrew Bailey “happily [marched] markets up the hill to expect a rate hike today only to need to march them back down again”.
“It’s really one of those moments where you have to question the communication strategy of the BoE. It had multiple occasions on which it could have gently nudged against the growing market anticipation around the November meeting being live but chose not to, and appeared to actively encourage tightening bets. Credibility is at stake, Mr Bailey. I’d said a hike was no slam dunk due to the way certain MPC members were leaning, but Bailey has been cheerleading tighter policy and didn’t vote for it himself – which suggests either he’s bad at communicating his views or there were simply not enough votes for him so he refrained from being a minority voter,” was Wilson’s withering reaction.
Samuel Tombs at Pantheon Macroeconomics noted that, actually, only half his fellow economists expected a hike to 0.25%.
“The Committee has played it safe by opting to wait for key labour market data, relating to the period since the furlough scheme has been wound down, to be published just before its next meeting on December 16 […] The Committee also appears to have become more concerned about the recovery’s near-term momentum, and it flagged that further downside surprises to GDP growth could prompt a longer delay. That said, its forecast for quarter-on-quarter GDP growth of 0.9% in Q4 looks about right to us, so a near-term rate hike still looks likely. We continue to expect the MPC to hold tight again in December and wait until February to hike Bank Rate, but the call remains finely balanced.”
At ING, James Smith said the MPC statement “makes clear a December hike is more likely than not”.
“More importantly, policymakers have offered very little pushback against market expectations for a series of rate rises next year. Nevertheless, we expect at most two rate rises in 2022.”
At Berenberg, Kallum Pickering said that the updated guidance that rate hikes would be needed ‘over coming months’ “does not pre-commit the BoE to hike rates in December”.
He pointed out that Bailey stressed in his opening statement that this decision will depend on economic developments in coming weeks, notably on the labour market as well as inflation and indicators of domestic demand.
“While our base case remains for a December hike, the decision could go either way with the first hike possibly delayed until February,” Pickering said, adding that remarks suggest that the BoE will raise rates less than the market is expecting.