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  • Dr Gerard Lyons

Bank votes to leave policy on auto-pilot

Today the Bank of England released their latest quarterly Monetary Policy Report and also announced the policy decisions from the Monetary Policy Committee (MPC) where for the current meeting the voting membership is down to eight from the normal nine members.:


in my view, the UK needs a gradual, predicable and immediate tightening in monetary policy. With inflation rising and growth recovering there is no justification for continued quantitative easing (QE) yet the MPC voted 7-1 for continued buying of gilts.


Which of the P’s is it? In my mind the question has been whether higher inflation: passes through; persists or becomes permanent. My view has been that it persists for a year or two. Also I stick with my forecast from earlier this year of a 7.8% rebound in growth in 2021.


Central banks used to ensure they were not behind the curve but the recent bout of inflation sees the Bank trying to play catch up. As expected bites of 8-0 & 7-1 despite their view inflation will peak at 4% in Q4 and that “spare capacity has eroded over the past couple of quarters.”


Once again the Monetary Policy Review doesn’t mention the word “money” suggesting monetary conditions play a minor role relative to their views of spare capacity and inflation expectations. They note SME credit conditions tightened in Q2 and household credit conditions eased.


Some takeaways on the BOE monetary policy review … central banks used to ensure they were not behind the curve but the recent bout of inflation sees the Bank trying to play catch up.


Although the MPC views elevated cost pressures “will prove transitory” it also says “the economy is projected to experience a more pronounced period of above-target inflation” in the near-term. Bank notes inflation expectations are “not elevated” & “appear to be well anchored”.


The Bank has yet to address the issues raised by the Lords report. There was some revised sequencing guidance on exit strategy. Bank now set to unwind QE and thus unwind previous asset purchases when rates hit 0.5%. I think QE should stop now.