The hawkish turn of the Bank of England

Bank of England update

When central bankers communicate their monetary policy intentions, they need to combine clarity with credibility. By clarifying what are the triggers of policy changes, the central bank can free itself to do less-market interest rates have been adjusted in accordance with the actions of the central bank. However, for such guidance to work, investors must know exactly what the central bank’s intentions are, and they must also believe that the central bank will do it if they have to. At last week’s meeting, the Bank of England formulated guidelines to achieve these two points.

A sort of Inflation is growing faster than expected As the economy reopened after the coronavirus restrictions, the central bank ended its previous guidelines of not raising interest rates until it “sustainably” reached its 2% target. Although the Bank of England expects that with the reopening of the economy, the current momentum of price increases will dissipate, it will still face the challenges of the labor market that has been changed by the pandemic and Brexit.

The central bank’s policy has not changed: its lending rate remains at a historical low of 0.25%, while the Bank of England maintains its target of total asset purchases. Nevertheless, this meeting is of great significance-both in terms of changes in inflation forecasts and in terms of how to lift the framework of the quantitative easing program.Through this combination, the central bank is helping to appease investors and economists who are worried The Bank of England has looked away from the ball Regarding inflation.

The bank raised its inflation forecast for this year, expecting the inflation rate to reach a peak of about 4%, but said it expects this to be temporary. The inflation rate is expected to fall back to 1.9% by 2023, slightly below its 2% target. Predictions based on current market interest rates indicate that investors and the central bank have agreed that only small interest rate hikes will be required in the next few years.

The central bank also proposed how to implement “quantitative tightening” when reducing its asset portfolio, thus adopting a stronger tone. The trigger is that its policy rate reaches 0.5%. At that time, the Bank of England will stop reinvesting mature bonds. After raising interest rates to 1.5%, it will also start selling these bonds. This reaffirms that interest rates will remain the main policy tool.

Crucially, the guidelines also provide room for the central bank to change its strategy if its forecast proves to be completely correct. As the pandemic ends, predictions of what will happen to inflation and wages can only be the best guess. Only guidelines that include the possibility of adjustments based on data are credible.

Compared with its overseas counterparts, the outlook for the Bank of England is more uncertain. In the UK, changes in the job market triggered by the pandemic were combined with the country’s departure from the European Union and new restrictions on immigration.It is not clear which Labor shortage -Or friction as the central bank calls it-is a temporary consequence of the reopening, reflecting more structural changes in the economy.

The Central Bank’s Interest Rate Setting Committee has indicated that it will pay close attention to Increase in labor costs The result is temporary, or something more permanent, which will eventually lead to inflation. This will determine the pace of any monetary tightening, not the progress of inflation next year. Investors who want to predict the next move of the Bank of England now know what to watch.

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