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Bank of England sets out plans to wean UK economy off stimulus

The Bank of England said on Thursday it could see a modest reduction ahead in the huge support it has provided to Britain’s economy during the COVID-19 pandemic and set out how it could gradually tighten monetary policy.

For now, the central bank decided to keep its stimulus at full speed, even though it expects inflation to jump to 4.0% around the end of the year.

Only one of the BoE’s eight monetary policy-makers, Michael Saunders, voted to reduce the size of its bond-buying programme which remains unchanged at 895 billion pounds ($1.25 trillion).

The vote to hold its benchmark interest rate at a historic low of 0.1% was unanimous, as expected.

With more than 70% of adults in Britain now fully vaccinated against COVID-19 and most social-distancing rules lifted, Britain’s economy has recouped much of its 10% crash of 2020.

This has prompted the BoE, like other central banks around the world, to spell out how it eventually plans to rein in its stimulus.

The BoE’s rate-setting committee said “some modest tightening” of monetary policy over its three-year forecast period was likely to be necessary .

It said it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting the proceeds of maturing debt, as long as that made sense for the economy.

Markets have priced in BoE rates reaching that level only in late 2023 or early 2024, after a first rate rise to 0.25% around August next year.

The BoE also said it would consider actively selling down gilt holdings when the rate reaches at least 1%.

Previous guidance, from June 2018, said the BoE would not start to unwind bond purchases until Bank Rate was near 1.5%.

Governor Andrew Bailey said much had changed in the past three years and “if we stuck with 1.5%, when you look at the market curve, that would be tantamount to saying that we would actually never reduce the … balance sheet as things stand today.”

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GRADUAL TAPER

The scale of the BoE’s asset purchases came under fire from lawmakers in Britain’s upper house of parliament last month, who suggested the bank was “addicted” to buying bonds. read more

Bailey called this a “very poor choice of language” as it had a “very damaging meaning for people who are suffering”, and denied the BoE was trying to reduce government borrowing costs.

Sterling was little changed after the announcement. British government bond prices were slightly lower.

“The Bank has given its fair share of false signals on this in the past, but the broad messaging is consistent with a number of other global central banks that are preparing markets for the very gradual tapering of monetary support,” Luke Bartholomew, an economist at Aberdeen Standard Investments, said.

The Federal Reserve’s top policymakers are also showing signs of a split about how quickly the U.S. central bank might need to scale back its quantitative easing plan. read more

TEMPORARY INFLATION

Bailey said unemployment was no longer expected to rise when finance minister Rishi Sunak’s job-protecting furlough scheme is phased out at the end of September. The key challenge for the economy was now whether firms could fill vacancies. read more

A big jump in wages could add to British inflation which hit 2.5% in June and which the BoE said was now on course to rise even further above its 2% target in the months ahead, touching 4.0% in late 2021 and early 2022, its highest in 10 years.

In May, it had forecast a peak of 2.5%.

But the BoE said it still thought the jump in inflation would prove to be temporary.

It forecast that inflation in two years’ time would be just above its 2% target. Deputy Governor Ben Broadbent said the forecast should not be read as a policy signal, and noted that inflation was below target in three years’ time.

The BoE said it expected Britain’s economy would grow by 7.25% in 2021, unchanged from its May forecast, one of the fastest expansion rates among big, rich economies. It edged up its estimate for growth in 2022 to 6%.

The MPC is due to return to its full strength of nine members once it appoints a new chief economist.

Source: Reuters

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Bank set to hold interest rates, but policymakers split on inflation threat

Speculation is mounting that the Bank may halt its £895 billion bond-buying programme as the economic recovery spurs on inflation.

The Bank of England will give its latest verdict on interest rates and the economy on Thursday amid a growing split among policymakers over the threat of soaring inflation as growth rebounds.

Members of the Bank’s Monetary Policy Committee (MPC) appear increasingly at odds over the need to swiftly remove some of its economy-boosting measures and whether surging inflation is temporary.

While interest rates are set to remain on hold at 0.1%, there is mounting speculation the Bank may halt its £895 billion quantitative easing bond-buying programme as the UK’s economic recovery spurs on sharp rises in the cost of living

The decision comes after two rate-setters – deputy Bank governor Dave Ramsden and MPC external member Michael Saunders – said swift action may soon be needed to cool inflation.

This suggested there may be growing support on the MPC for QE to be curtailed, after the Bank’s former chief economist Andy Haldane had repeatedly been the lone voice calling for a £50 billion QE cut before he left the committee last month.

But others on the MPC – including deputy Bank governor Ben Broadbent – remain of the view that inflation will still ease back after the year-end.

Policymaker Jonathan Haskel and incoming MPC member Catherine Mann have also signalled now is not the right time to cut support for the economy, with rising cases and concerns over the new Covid-19 Delta variant increasing uncertainty.

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Allan Monks, an economist at JP Morgan, said: “While there is a risk the Bank votes to suspend its remaining asset purchases, we expect downside risks from the latest Covid wave will persuade it to err on the side of caution and see out the current program.”

He said the Bank was more likely to instead give forward guidance on its plans for winding down QE to calm inflation fears.

Either way, the Bank will be looked to for assurances it can keep above-target inflation in check after recent figures showed it jumped to its highest for almost three years in June, at 2.5%.

The Bank is expected to hike the inflation outlook in its quarterly set of economic forecasts, to 3.6% in the fourth quarter from 2.5% previously, according to Mr Monks.

He believes lower-than-expected gross domestic product figures for May – when the economy grew by 0.8% – will see the Bank nudge down its 2021 growth outlook to 7.1% from 7.3 previously, but edge it up in 2022 to 5.9%.

The peak unemployment forecast is also set to be trimmed to 5.2%, but there will be little sign of an imminent rate hike, he added.

“We look for the Bank to project inflation falling back to 2% at the two to three year horizon… this would likely see the Bank endorsing a hike during the second half of 2022, broadly consistent with our forecast for a fourth quarter 2022 rate rise,” said Mr Monks.

Source: Shropshire Star

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BoE’s Haldane warns inflation headed towards 4 per cent

Andrew Haldane warned in his last speech as the Bank of England’s chief economist that policymakers risked losing control of inflation.

At an event hosted by the Institute for Government, Haldane said that UK consumer price inflation was headed towards 4% by the end of 2021 and that everyone would lose should inflation expectations became unhinged as a result.

Bank would be forced to play catch-up, hiking interest rates “materially” higher “and/or faster” in order to reanchor people’s expectations.

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“If this risk were to be realized, everyone would lose — central banks with missed mandates needing to execute an economic hand-brake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs,” he said in prepared remarks for the speech.

For now, there was no evidence that expectations had become unhinged, he added, but said that the recovery was changing the economy rapidly which could mean that rate-setters would have to shift their stance quickly.

“We’re moving from a regime of rather localized shortages and price pressure to a world of slightly more generalized shortages and generalized price pressures – from pockets of excess demand to aggregate excess demand,” he added.

Quick action was needed because “getting the cat back in the bag is jolly hard work.”

By Alexander Bueso

Source: ShareCast

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Inflation doubles as fuel, clothing and ice-cream all soar in price

Inflation doubled in April and could do the same again by the end of the year, some economists warned today, as pressure grows on the Bank of England to raise interest rates.

While that would risk curtailing the economic recovery, some say rates are simply too low at 0.1% and that the Bank is underestimating the chance of inflation spiralling out of control.

Prices rose at 1.5% in April up from 0.7% in March, higher than expected. Gas, electricity and petrol all jumped, as did more frivolous items such as chocolate and ice-cream – there has been talk of a 99 Flake shortage in the summer.

Ernst & Young says inflation will hit 2.7% in late 2021 or early 2022. “Further rises in consumer price inflation are highly likely,” says E&Y.

The Bank is supposed to keep inflation at 2% — it has undershot that target for the duration of the pandemic and for the last 21 months running.

But as the UK emerged from lockdown, pent up demand from consumers saw a spending splurge. By some estimates there is £60 billion of “excess” cash in bank accounts ready to be spent.

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Steven Cameron, pensions director at Aegon, said: “As the door to the economy reopens the expectation is that consumers will rush to spend savings built up over lockdown. There is concern that this creates inflationary pressures that pushes rates well beyond both the target and anything that consumers have had to deal with in recent years or for many in living memory.”

The most bearish economists note that there are price pressures in the pipeline on many vital goods, including energy and timber.

And they say that if you strip out a temporary cut in VAT on hospitality, inflation is actually already at 3.2%.

In the US, where government spending is even higher than in the UK, inflation hit 4.2% in April.

Ed Monk, associate director for Personal Investing at Fidelity International commented: “Inflation has started to take off. More than doubling to 1.5% in April, it is now closing in on the Bank of England’s 2% target and could blow past that if the demand in the economy continues to build in the coming months.”

Simon French at Panmure Gordon said: “These numbers confirm that inflation is going to pick up strongly this year, aided by comparisons with such depressed prices in 2020. However the Chancellor should hold his nerve. Inflation ultimately is a sign the economy is reopening, jobs are being created and livelihoods are being saved. To try and deflate the UK economy now would be a policy mistake.”

Petrol rose by 1.8p a litre to 125.5p. Gas and electricity bills both rose by more than 9%.

Ruth Gregory at Capital Economics said: “The rise in CPI inflation from 0.7% in March to 1.5% was almost entirely driven by energy price effects, which will only be temporary. We doubt a sustained increase in inflation that would concern the Bank of England will happen until late in 2023.”

By Simon English

Source: Evening Standard

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UK economy is set to grow at its fastest pace since the Second World War

The UK economy is set to grow at its fastest pace since the Second World War, overtaking the US, according to Bank of England economist Andy Haldane.

Low Covid infection rates and vaccinations are leading to a surge in consumer spending, he said.

The unemployment rate is also lower than expected.

However, there is a risk of 1970s-style inflation rates with “boom turning to bust”, he added.

Writing in a column for the Daily Mail, Mr Haldane said: “Spring has sprung for the UK economy. This year it is set to grow at its fastest pace since the Second World War.

“It is easy to see why. As Covid infection rates have fallen sharply and the vaccination programme has been rolled out, the health risks facing us have plummeted.”

Mr Haldane, who has previously warned against pessimistic views of the economy, said consumers are returning to shops, pubs and restaurants with retail spending above pre-Covid levels.

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The housing market is also booming, while hiring and investment among businesses is also picking up, he said.

Mr Haldane predicts as many new jobs will be created this year that are lost with unemployment figures revised down from 7.75% to less than 5.5%.

“A year from now, it is realistic to expect UK growth to be in double-digits, activity to be comfortably above pre-Covid levels and unemployment to be falling,” Mr Haldane said.

“Such a tennis ball bounce in the UK economy would put it at the top of the G7 growth league table.”

Mr Haldane, who sits on the Bank of England’s Monetary Policy Committee, predicted a sharp, V-shaped recovery last year which did not materialise.

Official figures published earlier this week showed the UK economy shrank by 1.5% in the first three months of 2021, but gathered speed in March as lockdown restrictions began to ease.

The reopening of schools and strong retail spending helped the economy grow 2.1% in March, its fastest monthly growth since last August.

Mr Haldane said if health and unemployment risks continue to remain low, spending is likely to continue.

However, he warned a rise in inflation levels could turn boom to bust “derailing the country’s recovery”.

“The most likely cause of such a bust, history tells us, is an unwanted bout of inflation.”

He added: “And experience during the 1970s and 1980s demonstrates that, once out of the bottle, the inflation genie is notoriously difficult to get back in.”

Mr Haldane estimates inflation levels by the end of this year could be above its 2% target and has voted for the Bank of England to scale back quantitative easing.

“Doing so now reduces the risk of a handbrake turn – for borrowing costs and the economy – down the road, with all of the disruption this would entail for our jobs and finances,” he said.

Source: BBC

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Bank of England predicts 7.25% growth in economy as interest rates held at 0.1%

The UK’s economy could grow by more than 7% in 2021, according to the latest Bank of England forecast – the fastest pace since the Second World War.

Their projection is that the UK gross domestic product (GDP) – a measure of the size of a country’s economy – will rebound by 7.25% and mark the best year of growth since official records began in 1948.
This represents a sharper recovery than the central bank’s previous forecasts, with 5% growth previously expected.
It comes after the pandemic saw the UK suffer the biggest drop in output for 300 years in 2020, when it plummeted by 9.8%.

But the Bank’s quarterly set of forecasts showed it downgraded its growth outlook for 2022, to 5.75% from 7.25%.

The rosier view for the economy this year came as the Bank’s Monetary Policy Committee (MPC) held interest rates at 0.1%.

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The Bank kept its quantitative easing programme on hold at £895 billion, although one member of the MPC voted to reduce it by £50 billion given the brighter recovery prospects.
In minutes of the latest decision, the Bank of England said the lockdown is set to see GDP fall by around 1.5% – far better than the 4.25% drop first feared.

It also sharply cut its forecasts for unemployment over the year.

The Bank said: “GDP is expected to rise sharply in 2021 second quarter, although activity in that quarter is likely to remain on average around 5% below its level in the fourth quarter of 2019.

“GDP is expected to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity.”

But it warned over “downside risks to the economic outlook” from a potential resurgence of Covid-19 and the possibility that new variants may be resistant to the vaccine.

Source: iTV

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UK economy shrank by less than expected in January

The UK economy shrank by less than feared in January as the country went back into a coronavirus lockdown, official data showed, but trade with the European Union was hit hard at the start of the country’s new, post-Brexit trading relationship.

Gross domestic product in January was 2.9 percent lower than in December, the Office for National Statistics said.

Economists polled by Reuters had expected a contraction of 4.9 percent.

UK economy is likely to shrink by four percent in the first quarter of 2021, due mostly to the latest lockdown but also because of disruption caused by new, post-Brexit rules for trade with the European Union, the Bank of England said last month.

“Today’s figures highlight the impact the pandemic continued to have on our economy at the start of the year as we tackled the new variant of the virus – and I know this is a cause of concern for many,” British finance minister Rishi Sunak said in a statement.
He added that the vaccine rollout and his budget announced last week were reasons to be hopeful.

Samuel Tombs, an economist with Pantheon Macroeconomics, said Friday’s data and other more recent indicators suggested the UK economy might now be on course to fall by a less severe two percent in the first quarter.

The BoE is expected to keep its stimulus programmes on hold at the end of its March meeting next Thursday as it predicts that Britain’s vaccination programme – Europe’s fastest – will trigger a bounce-back in the economy in the coming months.

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Trade disruptions

The ONS data showed exports and imports from Britain to the EU plunged by the most on record although the ONS said a difference in the way the figures were gathered was causing a delay to some data.

Exports of goods to the EU, excluding non-monetary gold and other precious metals, slumped by 40.7 percent. Imports fell by 28.8 percent.

Many companies brought forward imports of goods late last year to avoid the risk of border disruption as the new UK-EU trading relationship began in early 2021 and global trade flows have been hit by the coronavirus pandemic.

The ONS said the overall GDP figures were hit hard by the impact of social distancing rules on Britain’s huge services sector.

“The economy took a notable hit in January, albeit smaller than some expected, with retail, restaurants, schools and hairdressers all affected by the latest lockdown,” Jonathan Athow, an ONS statistician, said.

“Manufacturing also saw its first decline since April with car manufacturing falling significantly. However, increases in health services from both vaccine rollout and increased testing partially offset the declines in other industries.”

Britain’s economy shrank by 1.7 percent in the three months to January, a smaller fall than a median forecast of a contraction of 2.5 percent in the Reuters poll.

The economy was 9.2 percent smaller than in January last year, the ONS figures said.

Easing restrictions

Prime Minister Boris Johnson plans to ease England’s coronavirus restrictions gradually before lifting most of them by late June.

Growth in the next few months is also likely to get a boost from Sunak’s announcement last week that he will pump a further 65 billion pounds into the economy, including an extension of his jobs-protecting furlough scheme.

The ONS said Britain’s dominant services sector – which has been hit hard by social-distancing rules – shrank by 3.5 percent in January from December. The Reuters poll had pointed to a 5.4 percent contraction.

Manufacturing contracted by 2.3 percent but construction output rose by 0.9 percent.

The monthly fall of nearly three percent in GDP in January was much less severe than its plunge of 18.3 percent in April last year when Britain went into its first coronavirus lockdown.

Many companies have adapted to life under lockdown, including retailers who have ramped up their online shopping operations and services firms who have tried to help workers to do their jobs from home.

Source: Al Jazeera

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BoE governor is not expecting soaring inflation despite pent-up demand

BoE governor has said he is more positive about the future of the economy but added the optimism comes “with a large dose of caution”.

Andrew Bailey told BBC Radio 4’s Today programme that risks and uncertainty remain, including how much of the accumulated £180 billion unintentionally saved by high and middle-income households will be spent once restrictions ease.

Some economists have warned that the pent-up demand could lead to high inflation, but Mr Bailey said the central bank does not expect inflation to hit suggested heights of between 4% and 5%.

Instead, he believes it will return to around 2% in the next few months.

I think there will be for many people more of a hybrid model of working at home and working in a place of work… I would be very surprised if we went back to exactly as we were before Covid

Andrew Bailey, Bank of England

Mr Bailey also said he does not believe office workers will ever return to the pre-Covid five-days-a-week commute, with most employees working in a hybrid model.

The governor said: “I think we will see things change, because I think some habits and some practices will prove to be sustainable.

“I think there will be for many people more of a hybrid model of working at home and working in a place of work… I would be very surprised if we went back to exactly as we were before Covid.”

On the economy, he said: “We now have a more balanced picture of risks… The risks on the upside are that there has been a very large build-up in savings in the economy, largely because people have not been able to do the things they normally do.

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“The question of course then is: to what use will those savings be put and over what period of time? It could introduce more consumption and more demand into the economy.”

He pointed out that around 5% of savings could be spent over the next two years but “it could be larger”.

It has affected the low paid more, because the sectors of the economy that have had a larger shutdown tend to have a greater concentration of low-paid workers

Andrew Bailey

Mr Bailey said the effects of Covid have been very unequal, hitting the poorest hardest – with unemployment still expected to rise.

He said: “It has affected the low paid more, because the sectors of the economy that have had a larger shutdown tend to have a greater concentration of low-paid workers.

“I would also add that there are more women in that section of the labour force. I think there is a greater ethnic proportion in that labour force (too).”

Any new Covid variants that require further restrictions and lockdowns would also knock the economy, he added.

But the governor said the Bank of England was ready to use more “firepower” if required, including the introduction of negative interest rates to encourage spending.

Source: Shropshire Star

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Risks to UK Economy Remain Tilted to the Downside

Bank of England Governor Andrew Bailey said risks to the UK economy remain tilted to the downside, a remark that may rein in expectations that policy makers may soon shift toward containing inflation.

Bailey reiterated the bank’s guidance that it doesn’t intend to tighten monetary policy until there’s clear evidence the UK economy is absorbing excess capacity, and he noted that unemployment is likely to rise and remain higher a year from now. For those reasons, risks are “on balance distributed on the downside, though less so as time goes by.”

“There is a growing sense of economic optimism in markets and in consumer and business measures,” Bailey said in the text of a speech to the Resolution Foundation on Monday. “A note of realism though. Our latest forecast painted a picture of an economy that starts at a lower level of activity.”

The speech follows a sharp rise in U.K. interest rates in financial markets over the past month as Prime Minister Boris Johnson’s campaign to rapidly vaccinate the population from the coronavirus took hold. With the government working to loosen a nationwide lockdown, investors are starting to anticipate when the central bank might shift from supporting the recovery to controlling its strength.

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Bailey noted inflation remains below the bank’s 2% target and that before any more “there is a burden of proof we will need on the sustainability of the recovery.”

While the U.K. labor market has adjusted relatively quickly to economic shocks previously, the rise in unemployment was likely to be higher in a year partly because the worst-hit sectors are dominated by younger and lower-skilled workers who may find it harder to find new jobs, he said.

The furlough program, which pays 80% of wages to people whose workplace has closed due to the virus, “will help to preserve viable employment going forwards, and skills specific to particular jobs or companies, which is a good thing,” Bailey said, after Chancellor of the Exchequer Rishi Sunak extended the program until September in his budget last week.

“My expectation would be that this is likely to reduce the peak level of unemployment over the coming months,” Bailey said. “However, some rise in unemployment as the scheme tapers will be hard to avoid.”

By Lizzy Burden and Andrew Atkinson

Source: Bloomberg

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Sterling jumps following BoE’s decision to hold interest rates

The pound rebounded this afternoon as the Bank of England announced it would leave interest rates unchanged.

The currency saw its biggest fall in three weeks this morning as traders nervously waited to see whether the BoE would formally endorse negative interest rates.

The Prudential Regulation Authority’s analysis found the UK would need six months to prepare for negative rates as anything sooner would risk incurring “increased operational risks”.

The bank’s Monetary Policy Committee (MPC) unanimously voted to keep rates at 0.1 per cent and its bond-buying programme at £895bn.

Sterling welcomed the central bank stepping back and returned cable to $1.367 while two-year yields jumped from 0.1 per cent to 0.05 per cent.

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Against the euro it moved from a 0.2 per cent decline to a 0.6 per cent rise to reach a nine-month high of €1.141.

“This was primarily because traders know that negative interest rates are not going to become a reality,” Naeem Aslam, Ava Trade’s chief market analyst. “This particular fact was holding Sterling from further appreciation. Now, it is pretty much clear that negative interest rates are not going to come into daylight. Hence the path of the least resistance for the Sterling is skewed to the upside.”

But the bank did not rule out negative rates entirely, hinting they could be used in the future should conditions warrant them.

In a statement the BoE said it was expecting a rapid recovery in GDP towards pre-pandemic levels in 2021, led by the UK’s vaccination programme. However it cautioned the outlook for the year remains “unusually uncertain”.

“It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments”, the nine-strong MPC added.

By Angharad Carrick

Source: City AM

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