UK central bank maintains £895bn debt buying target

The UK central bank’s monetary policy committee (MPC) said on Thursday it voted unanimously to maintain its benchmark lending rate at 0.1% and by 8-1 to continue with the pace of its UK government bond purchases, targeting a cumulative £895 billion of “quantitative easing” by the end of this year.

The committee said it does not intend to tighten monetary policy “at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

Bank of England chief economist Andy Haldane, who steps down from the MPC this month, voted against the majority for the second meeting in a row, seeking to limit the total amount of quantitative easing — bond purchases — to £845 billion.

“At its meeting ending on 22 June 2021, the committee judged that the existing stance of monetary policy remained appropriate,” said the MPC.

“The MPC voted unanimously to maintain bank rate at 0.1%.

“The committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion.

“The committee voted by a majority of 8-1 for the Bank of England to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.”

The Office for National Statistics (ONS) said on Tuesday the UK Government’s debt stood at almost £2.2 trillion at the end of May 2021 or around 99.2% of gross domestic product (GDP), the highest ratio since the 99.5% recorded in March 1962.

On inflation, the MPC said: “Twelve-month CPI inflation rose from 1.5% in April to 2.1% in May, above the MPC’s 2% target and 0.3 percentage points higher than expected in the May Report.

“Core CPI inflation has also risen from 1.3% to 2.0%.

“Building global input cost pressures have increasingly been passed through into manufacturing output prices and non-oil import prices.

“CPI inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and is likely to exceed 3% for a temporary period.

“The committee’s expectation is that the direct impact of rises in commodity prices on CPI inflation will be transitory.

“More generally, the committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back.

“There are two-sided risks around this central path, and it is possible that near-term upward pressure on prices could prove somewhat larger than expected.

“Taking together the evidence from financial market measures and surveys of households, businesses and professional forecasters, the committee judges that UK inflation expectations remain well anchored.

“In judging the appropriate stance of monetary policy, the committee will, consistent with its policy guidance and as always, focus on the medium-term prospects for inflation, including the balance between demand and supply, and medium-term inflation expectations, rather than factors that are likely to be transient.

“The MPC will continue to monitor the situation closely and will take whatever action is necessary to achieve its remit.

“The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

Aberdeen Standard Investments senior economist Luke Bartholomew said: “The decision was as expected, with Haldane once again expressing his concerns about the inflation outlook by voting for a reduction in the size of government bond purchases.

“It will be extremely interesting to see who replaces Haldane in the chief economist role following his imminent departure.

“It is likely the Bank will drift back into a more relaxed tone on the transitory nature of any inflation pressure once Haldane’s voice and vote has moved on.”

Oxford Economics lead UK economist Martin Beck said: “Andrew Haldane, who leaves the MPC this month, repeated his vote in May to cut asset purchases this year from £150bn to £100bn.

“The policy statement was more bullish in several ways.

“The MPC thinks the economy will grow 5.5% in Q2, up from 4.25% expected in May.

“It also predicts CPI inflation will exceed 3%, compared to a peak of 2.5% previously forecast, with a risk that inflation could pick up more markedly.

“But with higher prices expected to be primarily driven by energy and commodity prices, the committee stuck to its view that above-target inflation should be temporary, and it reiterated its focus on medium-term prospects rather than ‘transient’ price pressures.

“The MPC will likely cut the pace of QE further in August, to meet its target completion date of end-2021.

“But the odds of a more abrupt change in policy look low.

“However, among the MPC, opinions differed on how to judge whether price pressures were temporary or persistent. One view attached weight to short-term data, while another favoured a longer-term perspective.

“Following Haldane’s warning that the UK faces the most ‘dangerous’ outlook for inflation in 30 years, the chief economist’s vote to rein back QE was predictable.

“Whether the departure of the arch-hawk will bear on the policy outlook depends on who succeeds him, although changing one voice on a nine-member committee probably won’t make thatmuch difference.

“However, MPC musical chairs extend beyond Haldane’s departure.

“Gertjan Vlieghe, who’s tended to be on the dovish end of the spectrum in his public statements, will leave the MPC in August.

“His replacement is Catherine Mann, formerly Global Chief Economist at Citibank.

“While largely an unknown quantity, what we do know about the new member suggests she’s comfortable with the ‘temporary’ inflation view.

“We share the MPC’s expectation that inflation should settle back to around 2% in the medium term.

“Forces influencing consumer prices in the short-term are not all one way; for instance, a stronger pound will weigh on import prices.

“What’s more, the supply-side of the economy may exit the pandemic relatively unscathed as the shock to GDP implies that spare capacity is likely to persist for some time.

“As a result, we stick with our expectation that the MPC will not start raising bank rate until the second half of 2023.”

AJ Bell financial analyst Laith Khalaf said: “Inflation is already above target and the UK economy is racing along, but the Bank of England isn’t taking its foot off the accelerator just yet.

“That’s because the inflation numbers are comparing activity now with this time last year, when the shock and scale of the pandemic was just sinking into the UK economy.

“We will only really be able to get an idea whether inflation is a flash in the pan or not at the back end of this year, at which point talk of transitory factors will be starting to wear thin.

“There is almost unanimous consensus in the Bank’s policy setting committee, with only the outgoing Andy Haldane raising a small hand of disagreement, by voting to curtail the QE programme at £845 billion.

“While there are certainly concerning bubbles appearing in some prices, the Bank has to balance the risk of stoking inflation against the possibility of puncturing the economic recovery.

“The Bank’s projections of contained inflation in the medium term are not without merit and there are still deflationary forces in today’s global economy, not least the possibility the pandemic may yet throw another curve ball that forces us to erect social barriers once again.

“However, the Bank’s forecasts do seem to be running behind the curve, with Q2 economic growth revised up by around 1.5% from a projection that was made just over six weeks ago.

“We can’t really blame the Bank for not nailing down such a dynamic and unpredictable situation, but it’s worth recognising that the data points on which monetary policy is being formulated are pretty shaky right now and subject to considerable change.

“Indeed, it’s notable the Bank now expects inflation to tick up over 3% in the short term, partly a result of the discounts provided by the Eat Out to Help Out scheme last summer.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.