The Bank of England’s message is upbeat, but there’s a sting in the tail

Analysis: a hawkish tone signals that at some point businesses will need to manage with less support

Unemployment has peaked. The pick-up in inflation will be temporary. All the ground lost during the biggest slump in 300 years will be regained by the end of the year. All in all, it was a pretty upbeat message from the Bank of England as it provided its quarterly update on the state of the UK economy.

Albeit one with a sting in the tail, because the eight members of Threadneedle Street’s monetary policy committee (MPC) wanted to send the message that they see the day coming when consumers and businesses will have to get by with less policy help.

Some MPC members think their previously announced conditions for the removal of some of the emergency stimulus provided since early last year have already been met, adding to the sense that the Bank is becoming more worried about inflation.

Despite the relatively hawkish language, however, only one member of the MPC thought immediate action was necessary, and it will be some time before the Bank actually gets round to what the governor, Andrew Bailey, called a “modest” tightening.

The Bank had little choice but to talk tough. Three months ago it predicted that the annual inflation rate would be 2.5% by the end of the year; after a summer of global supply-chain disruption and labour shortages it has raised that forecast to 4%. You can’t ignore that sort of thing when your statutory duty is to hit a 2% inflation target.

Threadneedle Street’s view is that the economy is bouncing back more quickly from the current crisis than it did from the financial crash of 2008. It thinks unemployment has already peaked at 4.8% and that the end of the furlough will not lead to a higher jobless rate. As a result, its estimate of the long-term damage to the economy is small (1% of national output), and has been revised down since May.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Yet if all that makes an argument for immediate action, there are reasons why the Bank is adopting a wait-and-see approach. For a start, it is a bit premature to declare the war against Covid over. What’s more, the end of the furlough and the phasing out of Treasury support might have more of a negative effect than the Bank is expecting. Finally, if the Bank is right about the absence of long-term scarring then there will be less inflationary pressure as demand picks up post lockdown and hence less of a need to act.

The first step towards what might be called the Bank’s new normal will be the end to bond purchases at the end of the year. It will only start whittling down its £895bn stock of assets when it has raised the official interest rate from 0.1% to 0.5% – something the City thinks could happen by the middle of next year if the economy performs as expected. That, though, is a far cry from the decade before the financial crash, when interest rates averaged 5%. The new normal will be nothing like the old normal.


Larry Elliott

The GuardianTramp

Related Content

Article image
Bank deputy expects UK inflation ‘comfortably’ to exceed 5% by spring
BoE monetary policy chief Ben Broadbent says pressures will include rise in energy price cap

Phillip Inman

06, Dec, 2021 @2:02 PM

Article image
Bank of England sharply raises UK growth forecast
Central bank predicts economy will grow by 2% this year as consumers and businesses appear to shrug off Brexit blues

Katie Allen

02, Feb, 2017 @12:46 PM

Article image
Bank of England must be wary of interest rate rise, says chief economist
Andy Haldane says UK at risk of sharp slowdown as BoE weighs up conflicting forces of inflation from weak pound and the Brexit vote denting confidence

Katie Allen

02, Dec, 2016 @2:37 PM

Article image
Bank of England walks the tightrope over interest rates
Rising inflation is pressuring Bank governor Mark Carney to raise the current 0.25% rate even as UK economic growth slows

Katie Allen

08, May, 2017 @9:51 AM

Article image
Brexit could lead to recession, says Bank of England
Central bank issues unprecedented warning over EU vote, claiming exit could depress pound and raise unemployment

Katie Allen

12, May, 2016 @5:18 PM

Article image
Bank of England edges closer to increasing UK interest rates
Three of eight-member monetary policy committee vote for increase after figures show further rise in inflation

Katie Allen

15, Jun, 2017 @11:11 AM

Article image
Rising inflation spooks Bank of England rate-setters into taking action
Analysis: on this occasion the MPC has decided the threat of inflation becoming embedded is greater than the risk to growth

Larry Elliott Economics editor

16, Dec, 2021 @1:35 PM

Article image
Bank of England meeting could discuss cutting interest rates
A recent run of bad news on the economy may have chipped away at Mark Carney and other policymakers’ certainty on the path for interest rates

Katie Allen

08, May, 2016 @12:41 PM

Article image
Recovery likely to push inflation above 3% by end of year, says Bank
UK interest rates put on hold with post-Covid boom expected to have impact on prices in coming months

Phillip Inman

24, Jun, 2021 @4:02 PM

Article image
Interest rates dilemma puts spotlight on Bank of England’s credibility
As markets bet on an increase, economists give their view after Andrew Bailey’s mixed messages

Richard Partington Economics correspondent

19, Oct, 2021 @5:00 AM