LONDON (Reuters) -The Bank of England kept interest rates on hold on Thursday, dashing investors’ expectations for a hike that would have made it the first of the world’s big central banks to raise rates after the COVID-19 pandemic.
But seven of its nine policymakers voted not to raise rates for now so they could see how many people become unemployed following the recent end of the government’s job-protecting furlough scheme.
“The short-term evolution of the labour market will be crucial in determining the scale and pace of the response,” BoE Governor Andrew Bailey said in a speech following the central bank’s decision.
“We do not yet have the necessary hard evidence on the state of the labour market following the end of the furlough scheme to make a sufficiently clear assessment. Over coming months that is likely to change.”
Only two Monetary Policy Committee members - Deputy Governor Dave Ramsden and Michael Saunders - voted for an immediate 15 basis-point rate hike.
Sterling slumped almost a cent against the U.S. dollar and the euro, and British government bond prices leapt as investors were wrong-footed by the BoE’s announcement.
Markets had previously priced a rate hike as a near certainty after Bailey spoke last month of the need to act to contain inflation expectations.
“The question is why has the governor sounded so hawkish over the last couple of months when in speech after speech he has clearly nudged market expectations higher,” Paul O’Connor, head of the multi-asset team at Janus Henderson, said.
The BoE’s cautious approach comes a day after the U.S. Federal Reserve said on Wednesday that it would start scaling back its bond-buying programme this month, a precursor to its first rate increase which investors expect in mid-2022.
The European Central Bank has been more explicit about its determination to keep the stimulus flowing. Its President Christine Lagarde said on Wednesday that the ECB was very unlikely to raise rates next year.
On Thursday, the BoE said the MPC voted 6-3 to let its government bond-buying programme reach its full size of 875 billion pounds. Catherine Mann joined Ramsden and Saunders to scale back that part of the bank’s stimulus programme.
Including its 20 billion pounds of corporate bond holdings - which this month will start to be reinvested in greener debt - the total asset purchase target remained at 895 billion pounds.
“VALUE IN WAITING”
The BoE said most MPC members still thought “there was value in waiting for additional inflation on near-term developments in the labour market” before easing off on stimulus - a warning against premature bets on tightening that they also made in September.
Earlier on Thursday, Britain’s statistics office said survey evidence showed most workers who were still on the government’s furlough programme when it closed at the end of September had returned to their employers on the same hours.
The MPC members who voted against a rate hike also noted a recent slowdown in consumer demand and the risk that higher inflation hits spending by households.
A Reuters poll last week showed economists had mostly expected a 6-3 vote in favour of keeping Bank Rate on hold. The poll had pointed to no change in the bond-buying programme.
The central bank’s new forecasts pictured weaker British economic growth as bottlenecks that have weighed on global supply chains continued in the near term.
The world’s fifth-biggest economy was seen regaining its pre-pandemic size in the first quarter of 2022, later than the BoE’s August projection for the last three months of this year.
Britain’s expected economic growth rate in 2021 was trimmed slightly to 7% and the forecast for 2022 was cut to 5% from a previous 6%. Growth is expected to slow sharply to 1.5% in 2023 and 1% in 2024.
Inflation was seen jumping to around 5% in April next year, driven mostly by surging global energy prices, before falling back to just below the central bank’s 2% target at the end of its three-year forecast period.
That projection was based on the BoE’s usual practice of taking energy prices predicted by futures markets for six months’ time and assuming prices then stay unchanged for the remainder of its three-year forecast period.
However, the BoE drew attention to an alternative scenario, which included the drop-off in futures prices that has been priced into energy markets.
That scenario showed inflation was likely to be “materially lower” than its 2% target in the second half of its three-year period, if interest rates also rose as fast as markets expect.
The inflation forecasts appeared to send a signal to investors that they have been pricing in too many BoE rate hikes. The interest rate pricing used by the bank show Bank Rate hitting 1% by the end of 2022.
Reporting by William Schomberg and David Milliken; Additional reporting by Sujata Rao; Editing by Hugh Lawson