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United Kingdom Monetary Policy August 2021

United Kingdom: BoE keeps rates and total target stock of asset purchases unchanged in August, but adopts a more hawkish tone

At its meeting ending on 4 August, the Bank of England (BoE) maintained the bank rate at the record low of 0.10%, where it has been since March 2020. Moreover, the Bank agreed to keep the total target stock of investment-grade corporate bonds and UK government bonds purchases at GBP 895 billion. However, one board member dissented, and voted to reduce the total target stock of bond purchases.

The Bank’s decision was driven by the desire to continue supporting the economic recovery, which appeared to take a slight knock at the outset of Q3 due to the surge in Covid-19 cases. Moreover, the BoE remained convinced that current elevated price pressures would be temporary, providing the leeway to take a wait-and-see approach.

That said, the Bank adopted more hawkish forward guidance, explicitly stating that “some modest tightening of monetary policy over the forecast period is likely to be necessary”. In addition, the BoE revised up its GDP growth projection for next year, as well as its inflation forecasts for 2021 and 2022, with inflation expected to reach 4% in Q4 this year. While most panelists see the bank rate at 0.10% until 2023, a few now pencil in hikes next year. The next policy announcement will be on 23 September.

Kallum Pickering, senior economist at Berenberg, is among those expecting a rate hike in 2022:

“After ending asset purchases in December, we continue to expect the first-rate hike to come in August 2022 (15bps). Today’s meeting suggests the risk to this call are for a rate hike somewhat sooner than we project.”

In contrast, Daniel Vernazza, chief international economist at UniCredit, said:

“We continue to expect the first rate hike in 2023, but the risks are now slightly further skewed towards a small (15bp) hike in the second half of next year.”

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