The Bank of England next meets on September 23. The delta variant is still clouding the outlook. The BoE is set to be the first major central bank to hike rates next year with inflation likely to remain moderately above its 2% target in 2022 and quantitative easing already due to end in December.
Source: Bank of Singapore, Bloomberg.
The BoE is also unlikely to make any changes this month as officials wait to see the impact on the labour market when the Jobs Retention Scheme finishes over the next few weeks. The government set up the facility to keep workers in jobs by subsidizing their wages during the pandemic. Once it ends, unemployment may rise.
But the BoE is likely to repeat its forward guidance on interest rates that modest tightening may be required as the UK recovers in the next few years.
Source: Bank of Singapore, Bloomberg.
This week’s key data releases were stronger than expected, underlining the central bank’s forward guidance, and increasing the chances that the BoE will start raising its Bank Rate from 0.10% in the first half of 2022.
The UK unemployment rate for the three months to July dipped again to 4.6% while August’s inflation rate jumped from 2.0% to 3.2%. As the first chart shows, inflation is now almost at a decade high, well above the BoE’s 2% target.
Last month consumer prices rose more than anticipated because of base effects from last year’s government Eat Out to Help Out discount dining scheme, from reopening demand raising prices of used cars and hotel stays and from costlier food. Thus, the BoE, like the Federal Reserve and the European Central Bank, expects this year’s surge in inflation to be only transitory and not require sudden interest rate increases to push inflation back it its 2% goal.
But with inflation likely to stay moderately above the BoE’s 2% target in 2021 and 2022 and the UK recovery able to absorb increases in unemployment when the Jobs Retention Scheme ends, the BoE is set to be the first major central bank to start hiking interest rates in 2022.
Early rate rises should benefit the GBP. As the second chart shows the currency still remains well below its 1.50 rate against the USD when the UK voted to leave the European Union in 2016.
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