Britain’s central bank is expected to raise inflation forecasts as analysts look for a stimulus exit plan.
When Bank of England policymakers meet on Thursday, they will be under pressure to offer more clues as to how they plan to reverse the emergency stimulus measures they adopted during the pandemic, when they cut interest rates to just above zero and started a £ 450 billion ($ 625 billion) bond buying program.
While the UK central bank is not expected to change its monetary policy stance on Thursday, it is expected to update its economic growth and inflation forecasts as pandemic restrictions have been lifted and the recovery continues. The debate facing the Bank of England and other central banks, including the Federal Reserve, is how much more stimulus the economy needs to ensure the recovery continues without overheating or losing control. inflation.
In Britain, the annual inflation rate is already above the central bank’s 2% target, and three months ago policymakers predicted it would temporarily exceed 3%. But the bond buying program is expected to last until the end of the year. Some members of the Monetary Policy Committee, such as Michael Sauders, have already suggested that the bank could start cutting stimulus measures, for example by terminating the bond buying program prematurely.
“Assuming energy prices do not continue to rise, much of this overshoot over the 2% target is expected to fade over the next year,” Saunders said. last month in a speech posted on the bank’s website. “But I am not convinced that (with the current political position) all the inflation overrun will prove to be temporary.”
A House of Lords report released last month called on the central bank to explain more clearly what it means by “transient” inflation and to show that it has a plan to contain price hikes. The report also states that the bond buying program has exacerbated wealth inequalities and that the Bank of England has not sufficiently engaged in the debate on the downsides of the sustained use of asset purchases, which started in 2009.
And then there is the question of what the central bank will do once it stops buying bonds. Historically, the central bank has said it will hike interest rates to 1.5% before starting to sell the assets of the bond purchase program, a threshold that has never been met since then. In February, the central bank asked its staff to reconsider how it should tighten monetary policy, including whether the order should be canceled to sell assets before raising rates. On Thursday, analysts will be looking for updates to the review. The markets are already predicting that the central bank will start raising interest rates next year.
The central bank is also expected to inform markets about the readiness of financial institutions for negative interest rates. In February, he gave banks six months to prepare for sub-zero rates so that he could change that policy if necessary. A negative interest rate would force banks to store liquidity at the central bank, which would also reduce other interest rates in the economy, for example on loans to businesses and households. In theory, this would encourage more borrowing and investment.
Since asking banks to prepare, the UK economy has experienced a recovery, albeit uneven, which has lessened the case for negative interest rates. But now, the Bank of England would have this political tool in its pocket.
After the bank’s chief economist Andy Haldane left in June, only eight committee members vote at this meeting.
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