The Bank of England indicates a “modest tightening” of monetary policy over the next two years

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The Bank of England said that “some modest monetary tightening is likely to be necessary” over the next two years to keep inflation in check.

In a hawkish change in stance from the central bank’s monetary policy committee, a majority of its eight members indicated at their meeting that ended on Thursday that they believed economic conditions had been met to allow it to begin discussing raising interest rates again.

The move came in response to the Bank of England’s new forecast which shows inflation is likely to rise to 4 per cent at the end of this year, compared to the previous forecast of only 2.5 per cent, and there will be excess demand for most of next year. .

Sterling rose after the decision, but rose only 0.22 percent on the day against the US dollar an hour after the meeting at $1,392.

Krishna Guha, vice-chairman of Evercore ISI, said the Bank of England “came out more hawkish than expected, and started building a case for medium-term tightening despite the near-term turmoil from the delta variant of the virus, which he assessed will have a ‘negative’ impact.” slight ‘on growth in the third quarter’.

But there was no urgent need in the MPC for immediate action. The committee voted seven to one to continue the £150bn program to buy government debt until the end of the year and unanimously to keep interest rates at historic lows of 0.1 per cent.

The Bank of England said most of the increase in inflation remains “temporary” and that the rate of price growth will fall sharply next year because energy prices will not rise further and supply bottlenecks in semiconductors and other commodities are likely to ease.

BoE forecasts showed that very gradual increases in interest rates are likely to be necessary to keep inflation close to its medium-term target of 2 per cent, with the first increase likely to come to about 0.25 per cent next year before rates reach 0.5 in cent. enacted in the year 2024.

The August meeting minutes highlighted how a majority of the MPC came to the view that inflation is now likely to be strong enough to meet the 2 per cent target “sustainably” and the committee can begin to talk about rate tightening.

The minutes said that while “some” on the committee believed that the conditions were not fully met, “other members of the committee were of the view that the terms of the current policy guidance had been fully met . . . but noted that the guidance made clear that these conditions were not necessary at any time.” gone, and were not sufficient for any future monetary policy tightening.”

In a further illustration of its long-term strategy to tighten monetary policy, the Bank of England announced that its first step would be to raise interest rates until they reach 0.5 per cent, and once they reach that level, it will no longer invest the proceeds of 875 billion pounds of government bonds it holds as soon as it matures.

This was a decision to cut the interest rate at which he would begin unwinding quantitative easing, partly because he was now able to set a negative interest rate if he wanted to and partly because he anticipated the market impact of ending maturity reinvestment. gilts to be small.

“The Monetary Policy Committee will actively consider selling some shares of the purchased assets only once the bank rate rises to at least 1 per cent,” she added. But she said she will monitor the impact of this new policy carefully so that she always aims to reach the 2 percent inflation target.

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