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United Kingdom Monetary Policy September 2021

United Kingdom: BoE maintains monetary policy in September amid dissenting votes and more hawkish tone

At its meeting ending on 23 September, 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, two of the nine board members dissented—an increase from the single dissenting member at August’s meeting—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 lose steam slightly during the first few months 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 scope to take a wait-and-see approach.

That said, the Bank adopted more hawkish forward guidance, reiterating August’s statement that “some modest tightening of monetary policy over the forecast period is likely to be necessary” and adding a note that since August’s report, “some developments during the intervening period appear to have strengthened that case”. While most panelists see the bank rate at 0.10% until 2023, a few now pencil in hikes next year.

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

“As our base case, we expect the first hike to come in August 2022 with two hikes likely in 2022. However, the risks to this call are increasingly tilting towards a hike as soon as May. We expect a second 25bp hike in December 2022 to take the Bank of England bank rate to 0.5% by end-2022. If that happens, it would open the door for the start of a passive balance sheet reduction—i.e. by not replacing maturing bonds—beginning in 2023.”

The next monetary policy announcement will be on 4 November.

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