Monetary Policy  

Is BoE 'walking blindly into arena of policy errors'?

Is BoE 'walking blindly into arena of policy errors'?

Markets reacted with surprise yesterday when the Bank of England acted against expectations that it was going to raise interest rates.

The MPC committee voted yesterday (November 4) to maintain the base rate of interest at the historic low of 0.1 per cent. 

This was despite the central bank's governor Andrew Bailey saying at the end of September that a base rate rise before Christmas was possible, and a few weeks later saying the Bank of England will ‘have to act’ on inflation.

The bond market had begun to price in a rates rise, with the 10-year gilt yield sitting at 1.074 per cent on Wednesday (November 3). This then dropped to 0.942 per cent within a few hours of the announcement as the markets re-calibrated.

Charles Hepworth, investment director at GAM Investments, said: "Trick or treating might be over this year, but the Bank of England decided that not altering rates at its committee meeting was the better treat(ment) for markets at present. 

"Like a Halloween hangover, this BoE is damned if they do and damned if they don’t and may be walking blindly into the arena of policy errors."

But Hinesh Patel, portfolio manager at Quilter Investors, said if the bank had acted yesterday it would’ve been “premature” given the lack of data.

“Some may feel a delay would unsettle funding and forex markets further, but given the furlough scheme and other government support schemes have just ended, it makes sense for the MPC to remain cautious, for now

“Lifting off the zero bound of rates will have to wait until evidence allows.” 

The minutes of the MPC’s meeting outlined how the majority of the committee wanted to wait for additional information before it tightens monetary policy.

This includes the next labour market review, which is due next week, as well as data on the period following the end of the furlough scheme.

Jason Hollands, managing director at Tilney, said the decision to hold was a surprise given recent messaging. 

“The MPC is still gearing up to raise rates but the perceived 'delay' comes down to a decision to wait for additional data. 

“The economy and pace of the recovery is clearly facing a few near term headwinds at the moment from rising energy prices, supply chain bottlenecks and the unwinding of pandemic support schemes.”

He added markets will essentially think that while the Bank will raise rates, it won’t go too far too quickly.

“That’s taking some of the pressure off gilts, with yields having fallen back since the announcement.”

Luke Bartholomew, senior economist at Abrdn, said the bank had done little to push back on mounting speculation about an imminent hike.

“We expect a hike in rates to come through in December, when policy makers will have at least some tentative evidence on how employment has performed after the expiration of furlough.